The News & What it Means – High Protein Spring Wheat May Offer Better Returns & IGC Counting on Lower Soybean Yields to Dampen Supplies

By John DePutter & Dave Milne – May 31, 2017


The news:

“The earliest reports from the start of the US hard red winter wheat harvest underscored industry fears of a second straight year of low protein, a factor that shifts the market’s focus to prospects for the North American spring wheat crop, a higher-protein variety.”

Reuters, May 30, 2017


What it Means:

Hard Red Spring wheat might very well end up being the sleeper pick of 2017.


If these ideas of a generally low protein US Hard Red Winter crop hold up through into this year’s harvest, HRS might end up as a much better cropping option than many farmers originally thought.


The spread of Minneapolis Hard Red Spring futures over Kansas City Hard Red Winter and Chicago Soft Red futures are already much wider than usual. This week, nearby July Minneapolis sported a spread of more than US$1.40/bu over nearby July KC.


The new-crop December delivery Minneapolis futures also show a fat premium over the other markets but it’s not nearly as big as that of the July contracts. Until recently, new-crop Dec Minneapolis was less than $1/bu over Dec KC. It wouldn’t be surprising if someday the new-crop months show the same wide premiums for spring wheat as the old-crop market currently shows.


The case for a continuing strong premium for new-crop Hard Red Spring rests partly on US production prospects. Spring wheat planted area in the US was already down from a year earlier, and now there’s some evidence that yields might not exactly set records. Monday’s USDA crop progress report pegged the US spring wheat crop at just 62% good to excellent as of Sunday, way down from last year’s initial condition rating of 79% good to excellent.


Plus, it’s getting a tad dry in a few US growing areas. A recent report from the North Dakota Wheat Commission noted that “precipitation is needed to promote crop development and yield potential.”


Bottom line

With acreage down, plus with some weather concerns creeping in, US spring wheat production prospects are declining this year. This could happen at the same time demand seems set to stay strong due to lower than normal percentages of high protein grain coming out of the winter wheat fields of the US.


It points to potentially better returns for high protein spring wheat than many farmers had expected, earlier this year.


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The news:

“Despite an increase in planted area, 2017/18 global soybean output is forecast to decline fractionally, to 348 million tonnes, on a retreat in yields.”

The International Grains Council, May 25, 2017


What it means:

Don’t be fooled by the year-over-year decline in expected output.


The soybean market remains well supplied – perhaps even over supplied. It’s important to note that even though the IGC is forecasting a slightly smaller world soybean crop in 2017-18, the 2016-17 crop is continuing to get larger.


In that regard, the IGC is now projecting world old-crop (2016-17) soybean output at 350 million tonnes, up 5 million from the April estimate and more than 60 million tonnes above the previous five-year average.


The start for the 2017 soybean crops in the American Midwest hasn’t been ideal, but there are no severe problems either. It could be that the US crop turns out bigger than the IGC thinks.


Indeed, lots of people think the 2017 USDA crop forecast, on which IGC projections are partially based, is under-estimating acreage. Another heavy U.S. crop this year would only add further weight to the world soybean supply.


Remember too, even if world production is down a tad in 2017-18, large volumes left over from 2016-17 will offset the increase, meaning total supply would keep rising.


There is a silver lining to the big supply outlook, however.

Heavy supplies today and forecasts for lots ahead have already pounded soybean futures to their lowest in about 14 months. With the July future recently slamming under US$9.25/bu, a good big serving of the bearish supply news is already sitting on the table. Point being, futures might not have to fall a whole heck of a lot more this spring to fully digest the current weighty fundamental condition.


As for prices this fall at harvest when the Northern Hemisphere crop rolls out of the fields, well, that’s another story.


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