The News & What it Means – A Glimmer of Hope for Wheat

By John DePutter & Dave Milne – November 7, 2019
The news:

“Dogged by lower prices and tepid demand, U.S. wheat farmers are poised to plant the fewest acres of winter varieties in 110 years.”

Bloomberg, October 28, 2019
What it means:

It’s not something that will lift prices now, but it’s at least some light at the end of the tunnel.

Yes, wheat producers have every right to be frustrated. U.S. winter wheat acres – and American wheat acres in total – have been trending lower every year since 2014. However, benchmark Chicago futures prices remain stubbornly weak to this day. This past year, U.S. winter wheat planted area fell to just 31.15 million acres, down 4% from a year earlier and 28% below just 10 years ago.

December Chicago wheat

The law of supply and demand is supposed to dictate that, as production is pared, prices will finally start to move higher again. However, as all farmers know, the biggest problem with wheat is that it is grown all around the world and harvested somewhere in almost every month of the year. So, while U.S. farmers might be cutting back, it’s entirely possible producers in another country are actually ramping up. Indeed, Canadian producers seeded just over 25 million acres to wheat in 2019, up slightly from a year earlier.

Chicago wheat future weekly nearest (Courtesy of Barchart)

World wheat production expected record high

Even with the smaller U.S. winter wheat crop this year, the International Grains Council (IGC) is nonetheless projecting total 2019-20 world wheat output at 762 million tonnes, up almost 4% from a year earlier and matching the record high achieved in 2017-18. It’s also worth noting the IGC sees a healthy world wheat crop despite the fact both Argentina and Australia, two significant wheat producers, have had their crops battered by dry weather.

There are other reasons why the smallest seeded area in the U.S. in over 100 years won’t slash production as much as you might think at first glance.

Going back 25, 50 or 100 years, yields weren’t anywhere close to where they are today. Wheat yields are trending up. Farmers can grow more wheat on fewer acres.

Plus, in decades past, the difference between seeded and harvested area was greater. Winter wheat wasn’t as hardy as it is these days. A lot of fall-seeded acreages used to be grazed or abandoned. These days, most of the area seeded is harvested.

All that said, the smaller U.S. acreage is a positive price factor

Although the 2020 U.S. winter wheat crop is off to a relatively good start – with government condition ratings above the year earlier level – the small acreage base means the crop will be more vulnerable to any potential weather problems that develop later this fall or into next spring. And let’s not forget the full impact of this fall’s terrible harvesting conditions on the Canadian Prairies and the U.S. northern Plains is still largely unknown. Maybe the Australian and Argentine wheat crops will be worse than expected as well. Maybe other parts of the world will run into weather problems.

The point is, the smaller U.S. acreage by itself isn’t flat-out bullish. But it’s certainly not bearish either.

It’s pretty clear that in 2020, wheat prices won’t be as low as they would have been with a larger seeded area.

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