Wheat Price Shakeup THE KANSAS CITY MARKET IS REAPING RARE PRICE BENEFITS OVER MINNEAPOLIS. By Tim Emslie S pring wheat farmers are accustomed to getting a higher price for what often are lower-yielding spring varieties compared to winter wheat varieties. At the same time, mills typically blend cheaper, lower-protein winter wheat with more expensive, higher-protein spring wheat. In 2014, those price relationships were turned upside down. The hard red spring wheat (HRS) contract listed at the Minneapolis Grain Exchange spent most of the fi rst half of 2014 at a discount to the Kansas City hard red winter wheat (HRW) contract for the fi rst time since 2006. Wheat Pricing 101 What drives the price relationship between wheat classes and what shape will the relationship take during the 2014–2015 marketing year? First, a little context. The fi ve classes of wheat traded in the U.S. are hard red winter, hard red spring, soft red winter (SRW), white and durum. Both HRW and HRS wheat are primarily used for bread fl our, with the key diff erence that HRS, with its higher protein content, usually commands a premium for use in blending with low-protein wheat for specialty breads. SRW is typically used for cakes, cookies and crackers, and comprises about 19 percent of U.S. wheat production on average. Durum wheat is used for pasta and is grown on relatively few acres. Worldwide, the top fi ve wheat producers are the European Union (EU), China, India, the U.S. and Russia. Since China and India essentially produce only for their domestic markets, Canada and Australia move into the list of top exporters, joining the EU, the U.S. and Russia. Among those top exporters, Canadian wheat is largely the equivalent of U.S. HRS wheat, and EU wheat is generally comparable to SRW wheat. Australia produces only white wheat, but it’s a high-quality, hard-milling wheat that competes with U.S. HRS wheat, Canada Western spring wheat and U.S. HRW wheat, depending on protein content. The largest volume of wheat exports by volume from Australia is premium white wheat, which competes directly with U.S. HRW wheat and with lower-protein Canadian red and white spring wheat. Although Russian production generally is a huge factor in wheat markets, its infl uence was less over the last year when narrowly considering the question of the price relationship between prices at the U.S. exchanges, since there was not a signifi cant imbalance in production by region. The country grows wheat in geographies similar to the varieties seen in North American wheat-growing regions. Price Comparisons For a good overview of price relationships on the U.S. futures exchanges, consider the relative supply-and-demand situations for the U.S. and worldwide. Looking back, U.S. HRW crop production has been low by historical standards for two years, while HRS wheat production has been strong. However, that relationship by itself was not suffi cient to cause Kansas City futures prices to move to a premium to Minneapolis futures until a huge increase in Canadian production was confi rmed in December 2013. Canadian yield beat the previous record by an astounding 21 percent. For comparison, that would be like the 2014 corn yield coming in at 200 bushels per acre. Argentina, an important regional exporter, harvested a poor crop, creating additional demand from Brazil for U.S. HRW. Combining the Canadian supply shock with Brazilian demand created the unusual premium in the Kansas City price. Get market news on Twitter by following @hedgeit. 2014 Price Expectations Looking ahead, the 2014 production cycle in the U.S. was more favorable for HRS than HRW. However, a return to more normal, lower yields in Canada is expected to normalize overall North American HRS wheat supplies and the price relationship between Minneapolis and Kansas City. Demand for North American milling wheat will get a boost from quality problems in the EU LEARN MORE SEPTEMBER/OCTOBER 2014 14 CHSINC.COM
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Wheat Price Shakeup
Tim Emslie
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