2020 Outlook for Canadian Wheat
2019 was a bit of divided year for the Canadian wheat market as durum slumped while exceptional spring wheat exports supported healthy prices, especially CPS wheat prices. As we flip the calendar into 2020 though, the market is less enthusiastic about HRS wheat, has found some love for durum, and CPS wheat remains one of the more profitable options in today’s crop rotation (at today’s prices that is!).
Back at the end of September, challenging harvest conditions in the U.S. Northern Plains and Western Canada helped spring wheat prices on the futures board rally. However, as farmers in these regions showed their resiliency and ability to get a crop off, dry it down, and bring it to market, the rally in spring wheat prices faded.
Thanks to grain prices across the complex finding positive gains in December, spring wheat prices also rallied again, gaining 8-9% on old crop contracts and slightly less for 2020 new crop values. Accordingly, spring wheat prices in Minneapolis basically ended 4Q2019 the same way they started the calendar quarter.
That said, in the cash market in Western Canada, you can tell in the chart below that HRS wheat prices was lockstep with the futures market rally. While average HRS wheat prices in the Canadian Prairies are still about 50¢ CAD/bushel below where we were a year ago, these levels may be near the top of the market for the next few months.
Conversely, lower protein spring wheat prices – i.e. CPS wheat – continues to perform very well, albeit, like hard red spring wheat prices, still a bit behind last year’s levels. I’ll talk about the implications of today’s spot spring wheat prices on 2020 new crop values in a bit, but in the meantime, consider where spring wheat prices – be it CPS or HRS – have trended between now and June last year. More explicitly, look at how spring wheat prices trend lower from February to May, and then the sideways-to-lower activity from June/July through September.
Looking at the durum market, values started 2020 like they finished 2019: sideways, albeit with a larger trading range. We’ve been playing around these levels though for the last few months, with average durum prices in Western Canada for spot movement hovering around the $7.50 CAD/bushel mark like glue. The major factors keeping a lid on further moves is good coverage by U.S. millers through 1Q2020, the likelihood of larger acres in 2020 and, currently, heavy available supplies. After all, we started the 2019/20 crop year in Canada and the U.S. with 9.4 MMT of available supply, between beginning stocks and this year’s production. That said, I’m expecting maybe a pop or two in March and/or June, but I’m favouring a slow sideways-to-lower trend over a sustained move higher.
Major factors influencing wheat prices will undoubtedly include Plant 2020 acres, Mother Nature, and whether or not we’re able to capture some export business lost by Australia and Argentina due to their smaller harvest and increased export taxes, respectively.
Keep in mind that there is still a combined 1.6 MMT of durum between the U.S. and Canada that’s expected to carry over into the 2020/21 crop year. While durum ending stocks of this size is certainly below average and arguably bullish, you have to remember that higher durum acres will bring available supply for 2020/21 back up.
Being a straight shooter, I’m expecting a few hard red spring wheat acres to be switched over into either CPS wheat or durum. Ultimately, I’m expecting hard red spring wheat prices to start to trend sideways-to-lower before stabilizing at a new price equilibrium that reflects lower hard red spring wheat acres in both Canada and the United States. Of course, my theory can easily be thrown out the window if we have a weather event or spring wheat exports pick up from their current pace, especially from Canadian ports.
Conversely, with higher expectations for CPS wheat acres in Plant 2020, any decline over the next few months is likely to be more pronounced than HRS wheat prices. That said, we’re going to have to watch U.S. winter wheat markets as this is what CPS wheat prices tend to be benchmarked off (Read the 2020 outlook for winter wheat prices here!). Regardless, CPS wheat prices continue to be a profitable option compared to traditional HRS wheat prices and this is likely to push more Canadian farmers to this alternative in 2020.
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