KANSAS CITY — Hard red spring wheat futures prices and cash wheat premiums in Minneapolis skyrocketed in recent weeks on mounting concerns supply at least of quality wheat of that class will be depleted before the 2008 crop begins to flow into marketing channels. The March future in Minneapolis surged above $15.50 a bu in trading last week, and the May future soared above $14, levels never before seen in wheat. On Feb. 5, the Minneapolis Grain Exchange announced it would expand daily trading limits effective Feb. 12 to 40c from the current 30c to accommodate the phenomenal volatility. The Kansas City Board of Trade and the Chicago Board of Trade were discussing following suit.
The extraordinary market moves have prompted the baking industry to call for government intervention, including not only the early release from the Conservation Reserve Program of environmentally sensitive acreage but also steps to curtail wheat exports (see related story on Page 11).
Record-high old-crop spring wheat futures prices thus far have failed to ration demand so stocks can be stretched into the new marketing year. New crop wheat futures prices set new contract highs on Feb. 8 and by last Thursday seemed poised to continue their advance. But it was uncertain whether record new crop prices were high enough to encourage producers to seed more spring wheat this year than in 2007.
The U.S. Department of Agriculture on Feb. 8 forecast the carryover of hard red spring wheat on June 1, 2008, at 73 million bus, down 44 million bus from the 2007 carryover of 117 million bus. It would be the tightest carryover of spring wheat since 1946. Many analysts in the trade suggested on the basis of continued heavy demand for spring wheat, the U.S.D.A. will lower its carryover projection in subsequent supply/demand reports. One analyst even suggested a negative 2-million-bu carryover for spring wheat.
Additionally, a wheat carryover date of June 1 doesn’t reflect the reality of the spring wheat market as the harvest in the northern Plains only gets under way in July and new crop spring wheat typically doesn’t begin to flow into marketing channels until the last week of July or the first couple of weeks in August.
Compounding matters for wheat buyers have been cash wheat premiums well above historical averages. The Minneapolis basis on 14% spring wheat last Thursday was 425c over the Minneapolis May, a record premium leaving the cash price for the benchmark for spring wheat at an eye popping $18.20 per bu. The cash wheat premium for 15% spring wheat was 500c over. By themselves, these premiums were higher than typical cash wheat prices in recent years. For instance, the national average farm price for wheat in 2005-06 was $3.42 per bu.
Meanwhile futures contracts in Kansas City and Chicago last week posted limit-up gains in the wake of the extraordinary strength in Minneapolis wheat. While still at wide discounts to spring wheat, users of hard winter and soft wheat also grappled with record prices.
Skyrocketing cash prices for spring wheat have not yet put the brakes to foreign demand for U.S. spring wheat. The U.S.D.A. projected 2007-08 exports of hard red spring wheat at 295 million bus, up 45 million bus from the previous year. But as of Jan. 31, exports and undelivered sales of hard red spring wheat for the current marketing year were 293 million bus, 18 million bus higher than the U.S.D.A. forecast, with four months remaining in the marketing year.
One miller expressed hope some foreign spring wheat buyers would sell back spring wheat cargoes and substitute lower-priced hard winter wheat cargoes. But some exporters were doubtful.
For decades, a major outlet for U.S. spring has been Pacific Rim nations. Anyone expecting demand from those customers to diminish in
response to higher prices likely will be disappointed, said Thomas J. Hammond, president, Columbia Grain International, Inc., Portland, Ore.
"We can’t ration demand," Mr. Hammond said. "Our customers have some pretty inflexible requirements. If there is any price rationing, it is going to take place in the U.S. first."
Mr. Hammond said he has been asked why private Philippine wheat buyers won’t sell back their spring wheat purchases and use hard winter wheat instead.
"For one thing, the end users there like spring wheat," he said. "That’s what they want. Even if end users were willing to switch wheat class in exchange for a lower price, it would be very difficult for Philippine flour millers to unwind what they’ve
already programmed. They purchase combination cargoes with white wheat, hard winter and spring wheat in different holds. To unwind something like that is easier said than done."
Recognizing tightness in U.S. spring wheat supplies, foreign buyers such as the Philippine flour millers have accelerated their buying programs for the current marketing year, Mr. Hammond said. Still, none of the major importing nations of Asia — the Philippines, South Korea, Japan and Taiwan — has yet covered requirements for the summer, when U.S. spring wheat supplies were expected to be desperately tight.
While Asian wheat buyers have been inflexible with regard to buying spring wheat, there has been some easing in rigidity with regard to specifications, Mr. Hammond said. Certain buyers that traditionally tender for 14.5%-protein hard red spring wheat were considering lowering protein specifications to 14%. Other quality compromises may be required in the months ahead, he said.
Asked whether tightness in U.S. wheat supplies was becoming a greater concern abroad, Mr. Hammond said it was.
"I have three guys from a Japanese television crew standing next to my desk right now, and it’s what they want to talk to me about," he said. "I don’t know what happens next. We’re in uncharted territory."
Unprecedented prices also have not adequately rationed domestic demand for spring wheat even with widespread substitution of high-protein hard red winter wheat for spring wheat by mills across the country.
High-protein hard winter wheat was trading at rapidly widening discounts to spring wheat of the same protein. Bakers and millers were working together to change formulations of products to accommodate a higher percentage of hard winter wheat compared with spring wheat in blends, and some formulas calling for blends were being shifted to hard winter wheat only. One miller described the shift to hard winter wheat from spring wheat as a "mad rush."
At the same time, some baked products — hearth bread, hard rolls, bagels and other specialty items — require flour milled from high-protein, high-gluten spring wheat. Bakers of these products had little or no flexibility with regard to substituting hard winter wheat for spring wheat. Their pressing needs were reflected in the recent widening in the spread between cash premiums on 14% protein spring wheat and 15% protein spring wheat.
Supply of high-protein hard red spring wheat was diminishing rapidly. U.S. hard red spring wheat production in 2007 totaled 449 million bus, up 4% from 432 million bus in 2007. Both the 2007 and 2006 crops had outstanding quality and were graded No. 1 dark northern spring. But only 43% of the 2007 crop had protein of 15% or more, whereas 48% of the 2006 crop had 15% protein or more. Stated in bushels, about 193 million bus of the 2007 crop had protein of 15% or more, while 207 million bus of the smaller 2006 crop had protein of 15% or more.
Most spring wheat already was in commercial hands. A Minneapolis grain merchant said a survey of northern Plains elevators indicated between 85% and 95% of the 2007 spring wheat crop in their territories already was sold by producers. The little wheat still owned by producers might not move until the new crop is planted and farmers have some confidence in 2008 production prospects, the merchant said. So there was no expectation farmer selling would bring noticeable pressure on the futures or cash markets in the near term.
While mills have maintained near-term pipelines in good order, offers of spring wheat for April-July were scant. It has been exceedingly difficult for mills to cover their summer needs, the Minneapolis grain merchant said.
Erica Peterson, marketing specialist for the North Dakota Wheat Commission, said she doubted spring supplies would be depleted before new crop, but that applied to undifferentiated spring wheat. Spring wheat supply with particular qualities and characteristics could indeed run out.
Those looking to Canada for rescue were confounded by a Statistics Canada estimate of Dec. 31 Canadian wheat stocks that fell well below expectations. Statistics Canada on Feb. 5 estimated Canada’s stocks of wheat excluding durum at the end of 2007 at 12,278,000 tonnes, down 5,223,000 tonnes, or 30%, from 17,501,000 tonnes a year earlier. The recent five-year average Dec. 31 stocks of wheat other than durum was 15,053,000 tonnes. Commercially held wheat stocks were estimated at 3.1 million tonnes, down 14% from the end of 2006.
"There has been some wishful thinking that the Canadians will bail us out," Mr. Hammond said. "But the Canadians haven’t been selling, and the Statistics Canada numbers explain why — stocks are low there, too."
The U.S.D.A. on Feb. 8 projected U.S. imports of Canadian spring wheat in 2007-08 at about 37 million bus, down from 50 million bus in 2006-07.
As if spring wheat users didn’t have enough to worry about, a new source of domestic demand has emerged: pasta manufacturers. Pasta makers not specifying their products are made of 100% durum semolina always were free to request a blend of durum and spring wheat. But with durum selling at an astounding $24 a bu, spring wheat even at record prices seemed alluring. The result has been an increase in blending spring wheat with durum for a number of pasta products, with individual products shifting to spring wheat only.
With old crop spring wheat supplies so tight and wheat prices so high, it would be normal for the market to anticipate an expansion in plantings for the new crop spring wheat harvest. But no such expansion seemed certain this year. All hinged on price movements of new crop spring wheat relative to those of several alternative crops, including corn and soybeans, durum and sunflower.
Producers in the Red River Valley of North Dakota and Minnesota have up to 10 crops from which to choose for planting. Farmers will determine what to plant with calculators in hand. In western areas, where durum and spring wheat are grown side by side, durum prices nearly double those of spring wheat could prove compelling. Ms. Peterson said durum plantings could expand 10% or even 20%, and this primarily would be at the expense of spring wheat.
The Minneapolis grain merchant said he was on the fence with regard to projecting spring wheat plantings. He pointed to private estimates calling for a smaller area planted to spring wheat this year. In addition to comparing input costs and prospective revenue per acre likely to be afforded by the competing crops, producers also had lingering concerns over variability in yield and quality seen in spring wheat in many years.
"We need unchanged to more acres and better yields to even hope we’ll be able to begin rebuilding stocks in 2008-09," he said. The U.S.D.A. will issue its Prospective Plantings report on March 31. But the report will be based on a survey conducted during the first two weeks in March, and minds can change in the northern Plains before farmers take to fields, which should keep the market on edge until more solid harvested spring wheat acreage projections become available.