As of Friday, July 22, there was a 50 cent per bushel carry in the market between KCBT September wheat and KCBT March wheat. With harvest wrapping up, this market signal tells U.S. farmers that wheat storage is more profitable than selling at current values. However, that carry is also telling buyers that wheat prices will increase in the coming months and that they should, if possible, buy now and capture that storage premium for themselves.
This carry in the market widened for several reasons, including the fact that wheat competes for elevation with corn and soybeans. USDA expects U.S. corn exports to increase 12 percent year over year to 133 million metric tons (MMT) and expects soybean exports to reach 138 MMT, up 5 percent from 2015/16.
Corn and soybean exports — though unseasonably strong — are not the current primary focus as traders wait for U.S. corn and soybean harvest to begin in September and October. Once those harvests begin, demand for barge and rail freight and elevation will all increase, which factored into the 25 cent carry from the KCBT nearby contract price compared to the December contract price on July 22.
While this competition partially explains the carry between the nearby futures and the March contract, there are other factors at play. The nearby futures price for KCBT wheat is near 10-year lows and currently below the cost of production for many producers, which not only makes them reluctant to sell, but also means prices are low enough to trigger Loan Deficiency Payments (LDP) in several counties.
An LDP provides U.S. farmers with a short-term loan if they retain ownership of their wheat and the current local cash price in a county is below the applicable county loan rate. This program encourages U.S. farmers to retain ownership of their wheat until prices improve, supporting farmer storage.
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Additionally, the carry represents the statistical improbability of a fourth consecutive global production record. According to USDA data, since 1960, the only time the world’s farmers produced four consecutive record crops was from 1980 to 1985. This improbability is seen in the uncertainty surrounding wheat production in a few major exporting countries this year.
While the 2016/17 U.S. hard red winter (HRW) harvest is nearly complete and safely in the bins, FranceAgriMer reported July 21 that harvest was 17 percent complete, compared to 53 percent on the same date a year ago. France — the European Union’s largest producer — received excessive rain throughout the spring and summer, hurting quality and yields.
French consultancy ODA Groupe estimates French wheat production at 30.4 MMT. If realized, that would be 27 percent lower than last year’s record yield of 41.0 MMT. Delayed planting progress in Argentina has also started to cut into yield potential there.
This is certainly a buyers’ market, but buyers will need to compete with corn and soybean exports for elevation capacity and with storage revenues for U.S. wheat.