Stronger Wheat Prices (But Until When?)
Last week, wheat markets continued their unseasonal push higher as the combination of frost, technical buying, and short-covering all helped the complex earn a positive performance before the September Labour Day long weekend. Supporting the wheat cash market was said frost – which unfortunately hit a large area of Saskatchewan and Alberta – as well as the smaller inventories that Statistics Canada claimed in their stocks report. Inherently, there are more than a few buyers who are taking the low inventory numbers with a grain of salt though, considering that StatsCan also suggested last week that this year’s wheat harvest will be the second-largest ever!
That said, the majority of this year’s increase in wheat production is attributed to durum and winter wheat and so, with a similar amount of spring wheat as last year, the price impact may be a bit more negligible. In fact, we have continued to see healthy off-the-combine premiums for spring wheat, especially CPS, low-protein, which is currently priced, on average across Western Canada, nearly 20% higher than it was at this time a year ago!
While I expect wheat prices to bump higher as we get closer to the end of the calendar year, I’m also aware that the same trend seen in year’s past may not be as robust this year, given the current levels we’re trading at, and the supply coming down the pipeline from Harvest 2020. Put another way, if you’re not yet at the 30% - 40% sold level that I’m currently at for HRS, CPS, and durum, you should consider pulling the trigger soon. Again, this isn’t to say that prices won’t improve over the fall/winter, but is it worth waiting a 3 to 4 months for just 20 – 30 cents/bushel more?
If your immediate cashflow requirements are already satisfied, then your answer should be “yes” but if not, you should consider some sales because, even though stocks are significantly lower than they were a year ago AND the five-year average, there’s still about 5 MMT of wheat in Canada that was left at the end of 2019/20! Don’t kid yourself, this is still a healthy amount of wheat, and therein, I’m cognisant of some of the pressure that wheat prices could face. This pressure will accelerate if the buzz about a COVID-19 vaccine builds, and we start to see demand from the hospitality and food services industries return (which, would likely mean slightly lower household demand).
This is usually where the reader should rightfully say out loud, “sure Brennan, but all this frost is going to push wheat prices higher, no?”. Well, if I’m being honest, not really. We have dealt with early frosts the last few years (last year being one of the worst, including my hometown of Foam Lake, SK on August 15!) but over this time, grain buyers have figured out how to do some serious paper blending. Also, keep in mind that we’re drying more grain than ever before, which is improving quality a bit (and padding the carbon tax revenue line on the government’s balance sheet, but I’ll leave this issue alone in today’s column). Last thing adding pressure to Canadian wheat prices is how large the Australian wheat crop looks, thanks to finally receiving moisture after 3 years of drought.
Ultimately, there are a still a few unknowns about the crop, but we do know that it’s moving very well right now, which can also explain some of the uncharacteristic improvement in prices. More specifically, nearly 1.8 MMT of non-durum wheat and 240,000 MT of durum has sailed through Week 4 of the 2020/21 crop year, which combined, is a 45% improvement over the first 4 weeks of 2019/20! Comparably, in the U.S., just over 6.5 MMT of wheat (all types) has been exported through their Week 13 of 2020/21, which is 1% above last year, and in line with the USDA’s full crop-year expectations.
What’s more relevant to me, however, is that total U.S. wheat sales are tracking 9% ahead of last year’s pace so far. Quite clearly, with Ukrainian and European wheat crops both significantly smaller than last year, there is strong international demand for wheat from alternative origins. I’m optimistic this demand will last for a few months but will fade a bit once Australia’s crop comes off. And while Argentina’s wheat is still under moisture challenges, wheat is a weed and it does figure out how to grow eventually! In simple terms, other than some seasonal and currency effects, we might’ve already seen all of wheat’s bullish headlines until the start of 2021.
CEO | FarmLead
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