NASS is fully expected to lower total US wheat production by 20-30 Mil Bu in its Small Grains Summary in late September, and end stocks in the months ahead are likely to be pulled below 900 Mil Bu for the first time in any WASDE report since 2015. This is completely a function of a downward revision to spring wheat harvested area – which has been left untouched so far, but abandonment is pegged far too low as evidenced by the graphic at left. Spring wheat GD/EX ratings on Aug 1st were the lowest on record. There’s a decent correlation between crop ratings and abandonment, particularly in years when GD/EX ratings were below 40% in late summer.
NASS protocol has limited changes to abandonment in July & August, but a fairly sizeable adjustment is expected in September. Amid ongoing drought in Canada, the US HRS balance still appears to be very tight.
AgResource estimates spring wheat abandonment at 8%, vs. the USDA’s 3.7%, and pegs HRS harvested area at 9.4 Mil Acres, vs. the USDA’s 9.9. A slight reduction in yield is also forecast. We have no major disagreements with the USDA’s demand estimates, and so HRS stocks in 2016/17 will fall to just over 100 Mil Bu, down 30 Mil from the USDA’s Aug forecast and down a hefty 132 Mil (56%) from last year. Much of the recent collapse in spring wheat futures is attributed directly toward the decline in other classes, as MGE wheat’s premium to CME and KC futures has been rather firm at $2.40-2.70 since July, but as winter wheat probes for a bottom, extreme caution is warranted in being bearish higher protein/quality wheat.
HRS stocks/use will be the lowest since 2007 and third lowest since 1987. ARC maintains that the goal is to slow demand and attract acreage in 2018 through price.
Certainly spring wheat futures’ premium to other classes needs to be sustained at $2.40+, and so fair value through early 2018 is pegged at $6.30-7.30, basis spot MGE futures. The graphic below charts the % change in cash prices in Minneapolis since July 1 this year and in 2006/07. Harvest-based weakness in the wheat market as a whole is noted, but a post-harvest recovery is probable beyond mid/late September. Highs were likely scored in spring wheat futures and cash markets in July, but a bearish outlook is not advised. As end users face very tight stocks in winter/spring, we expect basis rallies and for cash prices at principle markets to test $7.50-8.00/Bu.
Spring wheat seasonal trends in normal years turn broadly positive in Sep anyway, and so we urge end users to extend wheat/flour coverage on any further break.
