Welch on Wheat: Production Estimate Cut by 21M Bushels

    Market Situation

    WASDE. As expected, USDA lowered the production estimate for the 2014 U.S. wheat crop in today’s World Agricultural Supply and Demand Estimates. Production is now estimated at 1.942 billion bushels as average yield was cut from 42.7 bushels per acre to 42.3. This is a 21 million bushel reduction from the May production estimate.

    However, the production decrease was more than offset by decreases in use resulting in a higher ending stocks number than last month. First, for 2013/14, USDA raised ending stocks 10 million bushels on lower exports and feed use. This was carried over as an increase in beginning stocks for 2014/15. Then in new crop wheat, USDA lowered food, feed, and exports by a total of 45 million bushels. The net impact of these changes was an increase in wheat ending stocks of 34 million bushels with the stocks to use ratio increasing from 25% last month to 27%.

    Not only was the reduction in U.S. wheat production offset by lower use numbers, it was more than compensated for by the increase in world wheat production. World wheat production increased from 697 mmt to 702 mmt primarily on increases in the EU, China, India, and FSU-12.

    After adjusting for a 3 mmt increase in use and a slight decrease in beginning stocks, world ending stocks increased 1.2 mmt and world wheat supplies as measured by days of use on hand at the end of the marketing year are estimated at a 98.5 day supply, midway between the 10-year average of 93 days and the 104 day 20 year average.

    Crop Progress. Crop conditions in winter wheat are levelling off as the crop reaches maturity (86% is headed, 9% harvested). The crop condition index (very poor=1, poor=2, fair=3, good=4, excellent=5) for U.S. winter wheat is 269 this week, unchanged from the week before. In Texas, the crop condition index score increased 2 points on a 1% decrease in very poor and a 1% increase in the fair category.

    The index of Southern Plains wheat (Kansas, Oklahoma, and Texas) is again 212, unchanged in the last 3 weeks. The average Texas wheat yield is now estimated at 25 bushels, the lowest since 2006; Kansas wheat is expected to average 29 bushels per acre, the lowest since 1996; Oklahoma wheat is expected to yield 18 bushels per acre, the lowest since 1967. Oklahoma’s total wheat production estimate is the lowest since 1957.

    Monday’s Crop Progress reported the first condition scores of the 2014 spring wheat crop. Early season conditions are about normal with 71% rated good and excellent.

    Weather. The seasonal weather outlook for June through August calls for an equal chance of normal precipitation or better for most of the country except areas of south and east Texas and Louisiana. Temperatures are forecast to be above normal across the south and along both coasts, but cooler than normal in the northern Corn Belt.

    Longer term, models from the Climate Prediction Center forecast an 80% chance of an El Nino event later this fall. The most recent weekly sea surface temperature departure in the El Nino/La Nina critical region (region 3.4, between the international dateline and the western coast of South America) is 0.5°C, right at the El Nino threshold of +0.5°C. The Climate Prediction Center considers El Nino or La Nina to occur when the average 3-month temperature departure in region 3.4 is +/- 0.5°C and persists for a minimum of 3 consecutive 3-month periods.

    El Nino winters are normally associated with above average precipitation and below average temperatures in the Southern Plains.

    Marketing Strategies

    2014 Wheat Marketing Plan. I have completed all my pre-harvest pricing for 2014 and will sell the final 40% at harvest. At current prices, the impact of current hedging decisions for a hypothetical farm [1,000 acres of wheat, 23 bu. APH,-$0.40 basis, 65% revenue protection crop insurance, production expectations of 10 bushels per acre] is a revenue increase of 9.6% over crop insurance alone ($111,765 versus $102,015). With my hedging program in place, wheat revenue is basically unchanged as prices have fallen from over $8 back down to $7.

    Upcoming Reports/Events.

    June 16 – Crop Progress
    June 17 – Consumer Price Index
    June 20 – Cattle on Feed
    June 23 – Crop Progress
    June 27 – Quarterly Hogs and Pigs report
    June 30 – Crop Progress, Acreage, Grain Stocks

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