By John DePutter & Dave Milne – September 6, 2017
“Across the US this year, farmers planted the smallest number of acres of wheat since 1919. That’s the new reality in Kansas as more and more farmers are planting other crops to make a profit.”
– KSN.com, Sep. 1, 2017
What it means:
The markets are doing their job.
The laws of supply and demand dictate that when the supply of commodity is tight, prices will move high enough to decrease consumption and increase production. When the opposite occurs, low prices serve as an incentive to increase consumption and decrease production.
With wheat, we’re in an obvious surplus supply situation; so that means prices must go low enough to discourage farmers from producing it.
Admittedly, farmers have been trying to produce less wheat by seeding less wheat the past couple of years, but somehow the best yields always seem to come at a time when they’re least needed. The US all wheat yield hit a new record high last year and while drought is expected to help reduce this year’s American and Canadian spring wheat crops, much of that decline will be offset by massive yields in the Former Soviet Union.
In fact, the Black Sea region wheat crops are so good the International Grains Council raised its August global wheat production estimate by a major 10 million tonnes from a month earlier. Total worldwide wheat output for 2017-18 is now projected by the IGC at 742 million tonnes, down from the previous year’s record high of 754 million, but a hefty outturn no matter how you slice it.
And despite the expected lower production, global wheat ending stocks are still estimated by the IGC at 248 million tonnes, up 7 million from July and a new record high.
Clearly, something has to give and that something has to be prices.
This year’s drought on the US northern Plains and Canadian Prairies managed to send US wheat futures sharply higher for a time, but the markets have returned to earth almost as quickly. The benchmark for HRW, the December KC future, is now trading at just US$4.45/bu. There are places in the US Plains were the basis is 80 to 90 cents under that, making US$3.55 to $3.65/bu. Cases less.
When you figure the cost of production in the primary US wheat state of Kansas is anywhere from about US$4.50 to $5/bu, wheat makes little economic sense for farmers – just the way it’s supposed to be during times of oversupply.
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