Wheat Letter - September 17, 2009
U.S. Wheat Associates is the industry’s market development organization working in 90 countries on behalf of America’s wheat producers. The activities of U.S. Wheat Associates are made possible by producer checkoff dollars managed by 18 state wheat commissions and through cost-share funding provided by USDA’s Foreign Agricultural Service. For more information, visit www.uswheat.org or contact your state wheat commission. Original articles from Wheat Lettermay be reprinted without permission; source attribution is requested.
In this issue:
1. Time to Buy U.S. Wheat?
2. U.S. HRW Wheat Value is Peaking
3. Challenges and Opportunities with High Yield, Low Protein HRS
4. More Wheat in the Forecast Bumps Projected Feed Use
5. GAO Trade Agreement Analysis Undervalues Developmental Success
6. USW, NAWG Comment on U.S.-Colombia FTA
7. New Wheat Industry Paper Says Biotechnology Will Help Ensure Adequate Wheat Supplies
8. U.S. Wheat Associates Remembers Dr. Norman F. Borlaug
9. U.S. Welcomes Biennial Taiwan Agricultural Trade Goodwill Mission
10. Wheat Industry News
PDF and Online Version: Special Edition Wheat Letter - September 17, 2009 (www.uswheat.org/wheatLetter)
With prices moving down over the last few weeks and an abundant U.S. wheat harvest nearly complete, market factors are aligning to make this an excellent opportunity for our customers to consider laying-in stocks of U.S. wheat. In the last two issues of Wheat Letter, U. S. Wheat Associates (USW) reported on increasing demand for soft white (SW), final soft red winter (SRW) and initial hard red winter (HRW) crop quality. In this special edition, USW President Alan Tracy examines the wheat market and identifies where the price risks lie for wheat buyers. Vice President of Overseas Operations Vince Peterson then takes a closer look at the fundamentals underlying the HRW opportunity. Jim Peterson, Marketing Director, North Dakota Wheat Commission, explains the situation for buyers of high-protein wheat. Finally, USW Market Analyst Chad Weigand describes how the narrowing spread between wheat and corn prices may affect feed use, especially for SRW.
1. Time to Buy U.S. Wheat?
by Alan Tracy, USW President
After riding a commodity price roller coaster over the last two or three years, everyone involved in the wheat business should realize that change has become a constant; there is no returning to the tamer markets of the past. I have argued before to many of you that we have reached a new paradigm in wheat pricing in that wheat will no longer bounce off feed grain prices as their bottom and that the old highs had become the new lows. Even in the face of a big 2009 crop and the resulting price drop as wheat (and corn) crop estimates grow, I remain convinced that underlying demand growth for wheat is strong enough to keep supplies from becoming as burdensome as in the past. While the 2009 crop is now secure, any future production problems in any of the world’s major producing regions can kick off a new price spiral, with index funds jumping into the market again to drive prices even higher. The fact that fertilizer and other input costs have not fallen back to earlier levels reinforces that farmers will have to see higher prices to be encouraged to plant enough wheat acres to meet growing demand.
Perhaps, just like any wheat producer who puts seed in the ground and bets on a harvest, I am just fundamentally bullish, but I believe that prices as low as today’s will not last. I will make no predictions about short-term price movement, but I do not see as much downside price potential for buyers as there is upside risk, especially later in the marketing year as the harvest glut eases and the market begins to focus on next year’s production potential.
Please look at the price chart below. Prices today have dropped to levels we all consider low, and yet, as the horizontal line illustrates, they roughly equal the highs of just a few years ago. By producing the largest wheat crops ever the past two years, we are certainly testing my hypothesis that the old highs are the new lows. The bottom cannot be far away.
Yet, things are still changing. One interesting phenomenon is we appear, at least over the last three or four months, to have broken the inverse link between wheat prices and the strength of the U.S. dollar. For the last few years the dollar and ag commodities have moved in opposite directions, partially offsetting wheat price swings in importing countries because their currencies gained strength as wheat prices rose, and vice versa. Funds also flowed to commodities in order to hold their value when the dollar was falling, accentuating the counter movement of dollar and grain prices. Now that the 2009/10 wheat crop is largely in the bin, and corn supplies look like they will also be plentiful, wheat prices have been declining even though the dollar has been softening at the same time. The result is that while wheat is a good value in the U.S., it represents a genuine bargain in importing countries’ currencies.
Wheat buyers should note that in the Northern Hemisphere we have just begun planting winter wheat for harvest next summer. Globally, as well as in the U.S., winter wheat is the biggest share of wheat production, and producers are making their planting decisions at a time when their local wheat prices are mostly well below the cost of production. The potential income from soybeans and corn looks much more attractive and will take planted area away from wheat. Even with good yields, wheat production will fall, and with global consumption patterns at record levels, it is highly likely that we will draw down global stocks next year and that prices will rise. Change is coming again, but if we anticipate it, we can make it work in our favor.
These next few weeks, in the flush of an abundant harvest, represent an exceptional opportunity for the world’s wheat consumers to buy, to commit to future purchases and take long positions in the commodity markets or with their suppliers. If they do so, it will also help nearby prices, which will encourage more producers to plant wheat and, in turn, soften the next price upswing. That clearly is in wheat buyers’ interests both short term and long. Here at U.S. Wheat Associates we are asking the staff of our 15 offices overseas to carry this message to our customers, along with the excellent quality information about this year’s abundant U.S. crop, and urge them to buy now. Doing so will encourage U.S. producers while at the same time lock in supplies that will surely be worth more by the time they are used.
2. U.S. HRW Wheat Value is Peaking
by Vince Peterson, USW Vice President of Overseas Operations
In the midst of volatile markets and the daily economic battles, it can be very easy to overlook one significant benefit that the market is now offering all wheat buyers: the best landed-cost value for wheat the world has seen in several years.
Considering price in relation to quality, performance, and service, there is no doubt that value is peaking when we look at the situation with hard red winter (HRW) — the largest and most versatile class of bread wheat produced in the U.S.
Despite the fact that Mother Nature challenged individual HRW sub-regions, the U.S. has produced a crop that begins the marketing year with total HRW supply of 32 MMT when combined with ample carryover stocks. That is the same amount available to the market during the world-record 2008/09 crop. Not surprisingly, U.S. exports to date are running behind last year’s pace, but there are important comparisons. First, last year is early pace included accelerated sales to Iraq and significant new sales to Iran. Additionally, the high prices and volatility in 2007/08 likely encouraged many buyers to push ownership coverage ahead into the 2008/09 new crop period as insurance against any unforeseen return to earlier, untenable price levels. Pressed with a corn and soybean harvest that is not far off, storage facilities are filling up and HRW wheat prices remain under pressure.
On a straight FOB basis, Gulf HRW export prices are now back to pre-2007 commodity panic levels, as the HRW FOB price data Alan Tracy discussed shows. Beyond FOB prices, ocean freight has dropped precipitously since oil prices slid from the nearly $150-per-barrel highs. Because of a weakened dollar, HRW US$ C&F prices give a huge advantage to today’s effective landed prices when plotted against the currencies of many primary HRW export markets.
The following table lays out a HRW price matrix including FOB basis and the flat price in US$/MT. It then adds a basket of average freight rates for routes from the Gulf to both east and west coast South America, the Gulf to the Mediterranean, and from PNW to Japan to arrive at a hypothetical, average C&F price (HRW C&F $’s). We then convert those into local currencies in five sample markets. In all cases, current HRW prices at landed costs, in local currency, are at their lowest basis and flat price levels of the past four years. Many other countries fall into similar cost patterns, and in almost all cases, current prices are a "value" compared with anything since mid-2006 to early 2007.
With the most recent collapse in wheat prices, particularly when benchmarked against corn and soybeans, we expect winter wheat planting intentions will be lower. As low wheat prices begin to impact grower planting decisions worldwide, logic would say wheat buyers would take advantage of such opportunities. In turn, a brisker export pace would provide some leadership to future market direction.
In addition, here is some icing for the cake: finance rates down. To the extent that operating capital continues to grow, the cost of carrying inventories is also at levels not recently seen.
3. Challenges and Opportunities with High Yield, Low Protein HRS
by Jim Peterson, Marketing Director, North Dakota Wheat Commission
The 2009 U.S. HRS crop was approximately two-thirds harvested as of Sept. 13 and the crop has been bountiful so far. Late planting and a cooler-than-normal growing season have delayed harvest by two to three weeks. For many producers it is the crop of a lifetime, bushel wise. Along with the stronger than expected yields, grade quality has been very high on the harvest with excellent test weights, little-to-no kernel defects and sound falling number values.
The only exception to crop quality is a drop in the distribution of protein levels. Based on 45 percent of the harvest samples tested, the current regional protein average is 13.7 percent. This compares to a more typical HRS average in the mid- to upper-14 percent protein level. However, in some areas the crop is only producing a 12-percent average protein.
With bin busting yields and unusually low protein levels, market values for the lower end of the protein distribution are as much as $70 per metric ton below the market price for 14-percent protein wheat. This has taken some of the bloom off the 2009 hard red spring wheat crop for producers. It will also create challenges for some customers but tremendous opportunities for others.
Traditional customers who demand a 13.5- to 14-percent protein wheat or higher will likely face increasing market premiums for that segment of protein, especially as the year progresses. Due to higher than normal carryover supplies from the 2008 crop, merchandisers have had some higher protein to blend. However, the amount of high-protein wheat available for blending will become increasing tighter through the fall and winter months, if the remaining harvest continues to produce sub-par protein levels. Supplies of high-protein wheat on the world market were already historically tight in 2008 and could drop further in 2009 with the smaller Canadian crop and current situation with HRS.
Conversely, customers will find the supply of 12 to 13 percent protein HRS to be more plentiful. With current market discounts, this wheat offers tremendous value to buyers because HRS typically has inherently valuable baking properties such as high absorption and dough mixing stability. Preliminary mill and baking tests will not be available until early October, but some customers are already exploring the performance of the new crop and are pleased with what they are finding. Buyers are encouraged to take advantage of this tremendous market opportunity, by securing their high-protein needs or exploring the value offered by lower-protein HRS. The undervalued prices will likely strengthen as demand increases and harvest pressure eases.
4. More Wheat in the Forecast Bumps Projected Feed Use
by Chad Weigand, USW Market Analyst
USDA’s September World Agricultural Supply and Demand Estimates (WASDE) last week projected a further increase in global wheat production. USDA’s increase of 4.4 million metric tons (MMT) was the largest seen so far for the current marketing year. USDA’s global wheat production estimate now stands at 663.7 MMT.
The largest increase was for the EU, which USDA estimates will produce 138.5 MMT. Much of that increase comes from France where timely rainfall increased yields. While the WASDE reflects no changes in Australian production, the Australian Bureau of Agricultural and Resource Economics (ABARE) increased its output projection to 22.7 MMT after recent rainfall in Western Australia. The Australian government’s Bureau of Meteorology also indicated El Niño development appears to be slowing, a positive sign for Aussie wheat production.
If achieved, this year’s production will put global wheat supplies at a new record (see chart in Online Version), and markets have responded accordingly. Earlier this week, nearby prices for all exchanges fell to new contract lows. Chicago December wheat contracts closed at $4.54/bu. Except for one week in December 2008, wheat prices have not been at these levels since April 2007.
One of the effects of lower wheat prices has been the narrowing of the spread between wheat and corn futures prices. As of Sept. 11, the spread was $1.27, its smallest value since October 2008. The narrowing gap between the wheat/corn spread makes wheat more attractive as livestock feed. The cash price spread in some locations may be even more attractive given the negative basis levels currently seen for soft red winter (SRW). Basis levels for Toledo, OH, recently around -$0.90 for wheat and -$0.20 for corn. This closes the spread by an additional $0.70, resulting in a $0.57 cash price difference. USDA increased its 2009/10 SRW use projection this month by 545,000 MT (20 million bushels) to 12.5 MMT or 460 million bushels.
5. GAO Trade Agreement Analysis Undervalues Developmental Success
by Rebecca Bratter, USW Director of Policy
The benefits of bilateral and regional free trade agreements (FTA) for U.S. farmers and their overseas customers are undeniable (See USW, NAWG Comment on U.S.-Colombia FTA, below). That is why USW steadfastly endorses bilateral and regional agreements and hopes that a successful outcome to the Doha Round World Trade Organization talks will multiply such benefits on a global basis.
Now, a recently released report from the U.S. Government Accountability Office (GAO) on the impact of FTAs confirms that bilateral agreements result in commercial success. Unfortunately, the report overshadows that success with an emphasis on the lack of compliance with labor and environmental requirements.
By reducing or eliminating tariffs and implementing other mechanisms that open new markets, trade agreements can serve as a platform to promote fair competition by encouraging trade partners to adopt transparency in rulemaking, laws, and regulations. Simply put, trade agreements work in a mutually beneficial way, increasing sales of U.S. products including wheat and generating employment and income in the U.S. while helping partner countries capture the same opportunities.
A trade agreement should extract commitments from partners to level other facets of the socioeconomic climate that determine trade behavior and the cost of doing business, such as labor and environmental regulations. However, the GAO report detracts from the positive and very tangible benefits of trade agreements by excessively focusing on the labor and environmental shortfalls. According to the report, the shortfalls are not due to the structure of trade agreements but to the lack of human and financial resources dedicated to monitoring and enforcing these efforts. The situation is further complicated by confusion over which U.S. government agencies are responsible for monitoring and enforcement — and by an absence of quantifiable benchmarks for success. The GAO report’s emphasis on other factors that have less to do with trade and more to do with the U.S. government’s own lack of resources to enforce the terms of agreements obscures the critical message about the positive, multiplier effects of trade on job and income generation.
To date, the Obama administration has said little about its trade agenda beyond questioning the effectiveness of current and pending trade agreements. Movement on critical trade initiatives is on hold, and U.S. agricultural exports are losing sales and market share while the administration apparently reexamines its emphasis on monitoring and enforcement functions. The positive message on trade has fallen victim to a lack of capacity within the U.S. government to enforce trade agreement terms properly.
We suggest that the U.S. government allow the benefits of trade to stand on their own merit while developing parallel efforts to strengthen monitoring and enforcement. Such decoupling would unleash the positive impact of trade agreements and, in particular, the positive influence of vibrant agricultural trade for the U.S. economy — and for our trading partners.
6. USW, NAWG Comment on U.S.-Colombia FTA
The pending U.S.-Colombia FTA is crucial to the U.S. wheat industry’s efforts to maintain sales and market share in an increasingly competitive trade environment. That is the message USW President Alan Tracy and National Association of Wheat Growers CEO Daren Coppock sent in comments submitted this week to the Office of the U.S. Trade Representative.
Unless Congress ratifies the agreement, U.S. wheat could be at a severe price disadvantage and lose sales to Argentina, which enjoys duty-free access to the Colombian market, and to Canada, which could soon ratify its own FTA with Colombia that would eliminate duties on Canadian wheat. Tracy and Coppock said the Colombian industry has stated that even a 10-percent increase in duties on U.S. wheat imports over our competitors could result in a 50-percent loss in U.S. market share. At current prices, they said, that would result in a loss of almost $80 million to rural America every year.
Click here to read the USW/NAWG comments (http://www.uswheat.org/tradePolicy).
7. New Wheat Industry Paper Says Biotechnology Will Help Ensure Adequate Wheat Supplies
Biotechnology has the potential to help reverse the loss of wheat acres in the United States and help ensure there will be adequate supplies to feed a hungry world. That is the conclusion of a new wheat industry analysis released today.
The eight-page paper outlines the competitiveness problem facing global wheat production and why it matters for the entire food chain — wheat growers, wheat users at home and abroad, consumers in the first and third worlds, and the wheat industry itself, which is increasingly vulnerable to short-term supply shocks and a long-term cycle of decline.
Organizations collaborating on the paper included the National Association of Wheat Growers, U.S. Wheat Associates, the North American Millers’ Association, the Independent Bakers Association, and the Wheat Foods Council.
The paper emphasizes that there is no silver bullet to the competitiveness problem. However, it concludes that the rapid adoption of biotechnology traits in other crops produced around the world and grower testimonials in support of these traits lend credence to the idea that biotechnology can make a significant contribution.
The authors also devote significant space to their commitment to choice for consumers who wish to procure non-GM wheat and wheat products and producers who choose to meet this demand.
Globally, more than two billion acres of biotech crops have been safely grown, though there is no commercial production of genetically modified wheat anywhere in the world.
Wheat acres have been declining in the U.S. for three decades, and yield growth and net returns per acre for wheat have consistently lagged behind corn and soybeans over the past decade.
The industry first sought to formally address this problem in a 2006 paper entitled “Addressing the Competitiveness Crisis in Wheat” and a series of Wheat Summit meetings that followed. Many industry organizations are now supporting a goal of the National Association of Wheat Growers to increase national average wheat yields 20 percent from 2008 to 2018 through work on both biotechnology and non-biotechnology efforts.
The full paper is available online at www.uswheat.org/biotechnology and www.wheatworld.org/biotech.
8. U.S. Wheat Associates Remembers Dr. Norman F. Borlaug
The passing last week of Dr. Norman Borlaug occasions a celebration of the many accomplishments in his long, supremely productive career and his vision for a world without hunger. Dr. Borlaug will be remembered as the father of the Green Revolution that dramatically increased food productivity and likely saved billions of human lives.
Dr. Borlaug headed Rockefeller Foundation work in Mexico beginning in 1940s developed rust-resistant wheat varieties and dwarf forms able to tolerate heavy applications of fertilizer without lodging. The work helped Mexico achieve self-sufficiency in wheat production only 13-years later. Similar programs were implemented in Pakistan and India. Then Dr. Borlaug moved on to help increase production of other crops in Africa and Asia. He received the Nobel Prize in 1970.
“From the 1970s until his death he increasingly took the politically incorrect view that environmentalists were hampering world food production by indiscriminately attacking the use of chemical fertilizers and pesticides,” Washington Post writers said on Monday, Sept. 14. Dr. Borlaug — recognizing the imperative to adequately feed a population projected to reach 8.3 billion by 2025 — decried efforts to abandon conventional, high-yielding agricultural systems.
“You can’t build a peaceful world on empty stomachs and human misery,” he said.
Dr. Borlaug’s work continues to make a difference through many international organizations including the International Maize and Wheat Improvement Center (Centro Internacional de Mejoramiento de Maíz y Trigo), and the Borlaug Global Rust Initiative, which are leading the call for research to control Ug99 stem rust.
9. U.S. Welcomes Biennial Taiwan Agricultural Trade Goodwill Mission
The Taiwan Flour Mills Association will soon sign a letter of intent to purchase a total of 1.7 MMT — equivalent to 62.5 million bushels — of U.S. wheat during 2010 and 2011, including 85,000 MT of hard white (HW) in 2010 and 85,000 MT of HW in 2011. USW will co-sign the letter on Sept. 24 at the U.S. Capitol Visitors Center in Washington, DC, during Taiwan’s seventh Agricultural Trade Goodwill Mission to the U.S.
“We always look forward to hosting the Taiwan Flour Mills Association and greatly appreciate their commitment to purchase U.S. wheat,” USW President Alan Tracy said. “Taiwan’s millers remain very loyal customers in part because our partnership has mutual benefits.”
For example, since Taiwan’s last Agricultural Trade Goodwill Mission in 2007, a team of Taiwanese bakers, supported in part by USW market development programs, earned their place among the world’s best by placing second in the triennial Coupe du Monde de la Boulangerie (World Baking Cup) in Paris, France. Taiwan purchased virtually all its imported wheat from the U.S. in 2007/08 and the majority of its imports in 2008/09.
The Goodwill Mission includes a wheat delegation that will participate in the signing ceremony and other events in Washington, DC, next week. That team of Taiwan Flour Mills Association representatives then travels to Kansas, North Dakota, Montana, and California to meet with wheat commissions and state government representatives.
10. Wheat Industry News
- Schlecht to USW HQ. Shannon Schlecht started his new position Sept. 8 as Deputy Director of Policy at the USW Headquarters in Arlington, VA. Schlecht had served as Assistant Regional Director, Middle Eastern, East and North Africa, in Cairo, Egypt, since 2005. He joined USW in 2001 as Assistant Director, West Coast Office, in Portland, OR. Schlecht earned his bachelor’s and master’s degrees in agricultural economics at North Dakota State University. He is a native of Enderlin, ND, where he was active in a diversified crop and livestock farming operation.
- Dorr to Head USGC. Former USDA Undersecretary for Rural Development Thomas C. Dorr will become president and CEO of the Washington, DC, based U.S. Grains Council (USGC) Nov. 16, 2009. “The Council is focused on global initiatives,” Dorr said, “but the real purpose of this organization is to sustain and build economic opportunity not only for rural America, but worldwide. I am excited to serve U.S. farmers in this new capacity.” Dorr succeeds Ken Hobbie, USGC’s president and CEO for the last 18 years.
- In Our Thoughts. USW extends its sympathy again to Keith and Marlene Kisling of Burlington, OK, and their family on the death of Keith’s mother Sept. 3. Keith’s father also passed away in August.
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