The premium of futures in hard winter wheat to those in lower-protein soft wheat hit a fresh five-month top, even as US official forecast an “unusually high” spread thanks to quality setbacks in the world harvest.
The premium of Kansas City hard red winter wheat futures for December to those in Chicago-traded soft red winter wheat touched $0.17 a bushel on Friday for the first time since early April.
The gain also represents a marked turnaround from mid-June, when Kansas City wheat traded at an – unusual – discount of $0.24 a bushel, December basis, to its lower-quality Chicago peer.
And it followed a report by the US Department of Agriculture adding its voice to those cautioning over the quality of this year’s world wheat crop which, at 744.8m tonnes, it forecasts beating last year’s record high by 10.0m tonnes.
‘Sprouting, vomitoxin, uneven quality…’
“The quality of wheat in 2016-17 is likely to be much lower than the average of recent years, and last year as well,” the USDA said in a report.
“Intelligence reports about low protein content, low test weights, sprouting, vomitoxin, and uneven quality of the new harvest arrive from many parts of the world.”
(Vomitoxin is a toxic fungal residue which can, in high enough concentrations, render grain unfit even for use in livestock feed.)
The quality decline was viewed in part as a reflection of strong yields, “as wheat yield is negatively correlated with quality” – protein levels, for instance, tend to be lower in times of high productivity.
However, the USDA flagged too damage from late-season rainfall, with moisture on ripe crops encouraging sprouting, and quality downgrades, rather than boosting grain-fill.
“Reports of late rains in Canada, Russia, and even in Australia suggest that sizeable, and in some cases record, crops could have a higher-than-usual share of feed and low-protein wheat.”
‘Unusually high spread’
The dynamics will continue to be reflected in support for prices of higher quality wheat over lower grades to atypical levels.
“Wheat prices are expected to have an unusually high spread, with quality milling wheat enjoying a higher price premium,” the USDA said.
The premium of Minneapolis-traded hard red spring wheat – of higher protein still than hard winter wheat – was trading on Friday at $0.94 ¼ a bushel, December, close to contract highs reached two weeks ago, and well above the $0.29 ¼ a bushel touched in June.
Feed market battle
However, the USDA offered some solace too for farmers with lower quality wheat, saying that prices had reached low enough levels to win it market share among feed grain buyers.
“Feed wheat prices have been declining, and relative wheat/corn prices favour wheat over corn feeding.”
Chicago wheat futures stood at a premium of $0.70 a bushel to corn futures, December basis, on Friday, below a July high of $1.18 ½ a bushel
The USDA forecasts feed use of wheat in the US itself more than doubling in 2016-17 to its second highest level so far this century.