(Agrimoney) – For most things, such as cars or computers, a higher specification means paying more.
But not in wheat.
While usually soft wheat futures sit at a notable discount to those in higher-protein hard wheat, in the US, that situation has been reversed for the past month or two, at least for Chicago and Kansas City contracts.
Chicago-traded soft red winter wheat, which farmers often have to resort to selling to livestock feeders to find demand, touched a $0.19 ½-a-bushel premium over Kansas City hard red winter earlier on Friday.
Four months ago, its discount was around $0.45 a bushel (meaning large profits for any investors who have been holding a long Chicago-short Kansas City wheat spread).
‘Heavily weather damaged’
That is down largely to the poor quality of the US soft red winter wheat harvest, limiting the amount that makes the grade for food, and for delivery against Chicago futures, which require, for instance, Grade 2 characteristics.
Much of the later-harvested wheat especially has, thanks mainly to rain damage, failed to make this grade, in particular thanks to a lower falling number (a measure of kernel sprouting, as encouraged by moisture) which came in at 270 seconds for samples tested last week by US Wheat Associates.
Last year, itself hardly a vintage US crop, the falling number was 315 seconds, (and for the US hard red winter wheat crop 387 seconds).
“Test weight is lower than last year, and falling number is well below last year,” US Wheat Associates said in its latest harvest report.
It added that while it was still expecting more results from Indiana, “no further samples will be received from Missouri because elevators have been rejecting the heavily weather-damaged wheat remaining to be delivered.”
Export demand
On the demand side, however, US export trade so far in 2015-16 (starting in June) has been strong.
OK, total commitments so far, as measured by exports and orders yet to be completed are. At 1.62m tonnes, running behind last year, and notably behind the strong pace of 2013-14.
But they are ahead of the pace for the previous three seasons.
For hard red winter wheat, however, the 2.71m tonnes exported or on the books for 2015-16 is comfortably the worst at this stage in recent history.
For some uses, such as making biscuits, lower protein wheat is the only alternative. (In the UK, third grade wheat has sometimes found itself in unusual demand for similar reasons.)
Premium and discount
And Chicago wheat continued to outperform on Friday, rising albeit by a modest 0.2% for September delivery, to $5.07 ¾ a bushel as of 09:15 UK time (03:15 Chicago time), even as the Kansas City September contract fell by 0.2% to $4.88 ½ a bushel.
Chicago wheat also closed its discount to even higher-spec hard red spring wheat, which traded down 0.25 cents at $5.18 ¼ a bushel in Minneapolis for September delivery.
Expectations are strong of a good US spring wheat harvest, even if that in Canada will be drought reduced.
Earlier, the discount of Chicago to Minneapolis wheat narrowed to $0.07 ¾ a bushel, compared with an intraday high of $0.45 a bushel a month ago.
Yield expectations
Still all wheats fared better than corn, which in Chicago dropped by 0.5% to $3.78 ¾ a bushel for the best-traded December contract, in what could prove a volatile session.
“US yield forecasts from scattered crop tours were better than expected this week, limiting any potential gains ahead of Friday’s trade,” said Terry Reilly at Futures International.
And this session is one which will witness “positioning ahead of the weekend and early consolidation before the mid-week release of USDA’s survey-based crop production report”, he added, referring to Wednesday’s publication of the department’s monthly benchmark Wasde crop report.
Publication overnight of a Reuters’ survey of analysts showed the market expecting the USDA to cut its corn yield from the current estimate of 166.8 bushels per acre, but to 164.5 bushels per acre, above the figures in the low 160s being bandied about a month ago as the spell of benign weather was beginning.
Brazil vs US
The demand side has not been so good for corn either, with US weekly export sales data released on Thursday coming in at a negative 2,700 tonnes for old crop and a below-forecast 277,000 tonnes for 2015-16.
“Export sales tend to slow at this time of the year due to a ramp up of Brazilian exports as their second corn crop hits the market,” CHS Hedging noted.
“The trend is expected to hold true this year, especially with the Brazilian real trading at a 10-year low to the US dollar
