Given the strong surge in U.S. wheat futures prices over the past several weeks, U.S. Wheat Associates (USW) wants to share more information about the market factors behind the rise.

Some of the bullish factors do not appear to be short-lived. Driving the recent highs was remarkably higher Chinese demand for U.S. soybeans, corn and wheat; increased investments by managed money in U.S. agricultural commodities exchanges; news that the Russian government increased its wheat export tax; and continued dryness in the High and Southern Plains.

U.S. Corn, Soybean and Wheat Exports to China

Historic U.S. commodity sales to China are supporting high wheat futures prices. To date, the United States has sold 11.8 million metric tons (MMT) of corn to China, completely eclipsing the last record of 4.90 MMT shipped to China in 2013. According to Reuters, China is on track to be the largest importer of U.S. corn for the first time in history. And sales aren’t slowing down: on Jan. 29, USDA reported a flash sale of 2.10 MMT of corn to China, the largest sale of U.S. corn to an overseas customer in a single day since 1991.

U.S. soybean sales to China have also set records. To date, the U.S. has sold 34.7 MMT of soybeans to China, 190% more than this time last year and 74% more than the 5-year average.

China’s demand for U.S. wheat has also been strong. Total sales to China, now the third-largest market for U.S. wheat, are substantially higher than this time last year at 2.58 MMT, more than 5 times greater than the 5-year average. HRW sales to China now total 1.13 MMT, the first major Chinese HRW purchase in many years. HRS sales to China of 566,000 metric tons (MT) are nearly nine times greater than the same period in 2020 and white wheat (soft and hard) sales are up more than 400% at 714,000 MT.

Technical Strength

Joining the trade excitement are managed futures funds, an investment where professionals actively manage a futures contract portfolio. These speculative commodity funds are buying significant amounts of U.S. corn, soybean and wheat futures contracts. They are “long” in the markets with the expectation that the contracts will gain value over time.

“Simply put: China is driving the boat,” said one U.S.-based trader. “Funds are pouring money into Chicago and other exchanges because of our massive balance sheet of sales to China.”

“If corn jumps 19 cents per bushel in one day, wheat is going to follow in a big way,” said another trader.

Managed fund participants serve an important role in futures markets, giving buyers and users of a commodity like wheat the opportunity to hedge their price risk through speculators that accept the risk of price movements.

Russian Wheat Export Tax

What happens in a leading wheat exporting nation can move the market. On Jan. 26, the Russian government announced it would increase the country’s wheat export tax from €25 per MT to €50 per MT for March 1 to June 30 deliveries in an attempt to secure domestic food supplies and stabilize domestic prices. After Russia’s government approved the tax increase, Minister of Economic Development Maxim Reshetnikov said: “We hope in the near future the price situation will stabilize and we will be able to switch to a permanent mechanism of export duties.” Even so, USDA expects total Russian wheat exports in 2020/21 will reach 39.0 MMT, up 13% from last year and 18% more than the 5-year average, if realized.

The increased wheat export tax and minimal domestic selling by Russian farmers have also supported global wheat export prices. According to AgriCensus, between early December 2020, before the initial €25 per MT tariff was announced, and early February 2021, Russian 11.5% protein wheat (dry matter basis) free on board (FOB) prices increased 15% to $292 per MT. By comparison, Texas Gulf 11% HRW (12% moisture basis) FOB traded at $280 per MT at the beginning of February.

Drought Stress Across the Great Plains

Despite recent precipitation in some areas, extreme dryness continues to plague U.S. winter wheat producers, an all too familiar situation for wheat farmers in eastern Colorado, western Kansas, western Nebraska and eastern Wyoming.

“Dryness in the Plains adds underlying support to wheat futures prices,” said a grain trade representative.

As of Jan. 28, according to USDA, Colorado winter wheat ratings slipped from 19% good to excellent in early January to 17% by late January and 43% of Kansas winter wheat was rated good to excellent, down from 46% in late December 2020. USDA also reported that as of Jan. 26, 2021, “an estimated 32% of U.S. winter wheat production is within an area experiencing drought,” including major sections of U.S. hard red spring and northern durum production regions.

Every Friday, USW compiles information from market sources, including U.S. wheat exporters of all classes from various U.S. ports.

By Claire Hutchins, USW Market Analyst

For the first time since 2013/14, total U.S. winter wheat planted area increased on the year as producers took advantage of dry seeding conditions and strong prices through fall 2020. USDA’s 2021/22 Winter Wheat Seeding report, released Jan. 12, reported U.S. farmers planted 32.0 million acres (12.9 million hectares) of winter wheat for harvest in 2021, up 5% from marketing year 2020/21. Increases for hard red winter (HRW) and soft red winter (SRW) more than offset a slight decrease in white winter wheat planted area.

Hard Red Winter

USDA assessed HRW planted area at 22.3 million acres (9.02 million hectares), up 4% on the year. Planted acreage is up year-over-year in several major HRW-producing states with the largest increases reported in Montana, South Dakota and Kansas. Montana planted area increased 10% on the year to 1.70 million acres (688,000 hectares) and South Dakota planted area jumped 13% from last year to 710,000 acres (287,000 hectares). In both states, dry planting conditions from September to October were a welcome change compared to sodden, impassable fields in fall 2019.

“To look at this year, we have to first go back to fall 2019 planting when fields were extremely wet and producers left many acres to prevent plant,” said Reid Christopherson, executive director, South Dakota Wheat Commission. “Finally, in fall 2020 there was optimism around wheat. Conditions for seeding were good and prices were giving us encouragement, which boosted HRW planted area.”

In Kansas, HRW planted area for harvest in 2021 is up 10% from last year at 7.30 million acres (2.95 million hectares) as extreme dryness deterred producers from planning to plant corn, which is more water intensive than wheat.

Strong markets also incentivized the expansion of U.S. winter wheat acres. According to Justin Gilpin, CEO, Kansas Wheat Commission, many fallow acres in western Kansas went back into winter wheat last fall as producers reacted to a spike in futures prices. Between late August and mid-October, Kansas City Board of Trade (KCBT) HRW futures prices for nearby delivery jumped 18% to $5.59/bu, the highest since August 2018, as “managed money” or commodity funds bought significant amounts of U.S. wheat futures contracts with the expectation that the contracts would gain value over time.

HRW planted area in Colorado and Oklahoma, two other major winter wheat producing states, also increased several percentage points on the year as producers jumped on higher HRW prices.

Soft Red Winter

Total SRW planted area of 6.23 million acres (2.52 million hectares) is up 12% from 2019 and 8% from the 5-year average as producers took advantage of pristine planting conditions and strong Chicago Board of Trade (CBOT) futures prices. Increases in major SRW-producing states more than offset decreases in Ohio and Maryland.

Planted area is up significantly in states tributary to the Gulf of Mexico, namely Wisconsin, Illinois, Missouri and Tennessee. Wisconsin planted area is up 72% from last year, Missouri planted area is up 38%, Illinois planted area is up 11% and Tennessee planted area is up 33%.

“Strong futures prices, strong farm gate prices and a quick soybean harvest in many Midwestern states incentivized SRW producers to plant more wheat acres this year, specifically in Wisconsin and Missouri,” said a grain trade manager.

Like with HRW futures prices, SRW futures prices also saw a significant jump during the fall planting season as commodity funds poured money into the Chicago futures exchange.

Every Friday, U.S. Wheat Associates (USW) publishes its Price Report, compiling information from market sources, including U.S. wheat exporters of all classes from various U.S. ports. Subscribe here to receive the weekly report.

By Claire Hutchins, USW Market Analyst

 

By Claire Hutchins, USW Market Analyst

Since June, U.S. Wheat Associates (USW) has carefully tracked the relationship between limited export elevation capacity and high U.S. wheat export basis values. Significantly greater Chinese demand for U.S. agricultural products has limited export elevation availability, causing an increase in wheat export basis values for October 2020 through February 2021 deliveries. However, the anticipation of seasonally reduced Chinese demand for U.S. agricultural goods could pressure U.S. wheat export basis levels for March 2021 and forward delivery periods.

The United States has sold historic levels of soybeans, corn and wheat to China for delivery in 2020/21 following the Phase 1 Trade agreement between both countries. As of Nov. 26, soybean sales to China at 29.7 million metric tons (MMT) are more than three times greater than this time last year and are nearly double the 5-year average. Corn sales to China at 11.2 MMT are magnitudes greater than late November last year and the 5-year average. Total wheat sales to China at 2.06 MMT are more than ten times greater than this time last year and are nearly five times greater than the 5-year average.

 

“January, February and the beginning of March are at capacity; we can’t add a lot more business for those months,” said one industry contact. “If anyone were to sell anything for those delivery periods, it would raise elevation costs substantially more.”

Though wheat export basis levels are projected to remain high through early March 2021 as traders work to execute the large volume of existing commodity sales, industry contacts currently predict a sizeable decrease in U.S. wheat forward export basis values if China’s demand for U.S. corn subsides and if Chinese buyers shift to importing Brazilian soybeans.

According to Trade Data Monitor (TDM), most Chinese soybean imports usually come from the United States between October and February and from Brazil between March and September. On average, soybeans from Brazil jump from 46 to 83 percent of China’s total imports between February and March. Traders anticipate this seasonal trend will continue in 2021, which could increase U.S. wheat export elevation availability in the Pacific Northwest (PNW) and Gulf and could decrease wheat export basis levels from those regions.

 

The latest USW Price Report indicates the trade has assumed Chinese demand will slow in the first three months of 2021. The current export basis delivery values for PNW hard red winter (HRW) 11.5 protein show a 5 percent inverse between February and April deliveries.

 

The report also shows a 10 percent inverse between February and April export basis levels for PNW hard red spring (HRS) 14.0 percent protein.

 

“April forward is when export basis really lightens up and we become more competitive,” said one trader, “there’s strong interest in U.S. spring wheat for that period.”

 

While Gulf HRW and soft red winter (SRW) export basis values are forecast to remain relatively stable over the first few months of 2021, the Gulf HRS 14.0 percent protein export basis forecast currently shows a 16 percent inverse between February and April deliveries.

USW does not have a crystal ball, but we do expect downward pressure on most U.S. wheat export basis values between February and April 2021, as long as China’s import demand for U.S. corn and soybeans slows down and inland logistics continue operating smoothly. USW will continue to monitor trade and logistical developments in the coming months and will communicate anticipated basis changes to our customers.