Wheat Outlook: Surge in U.S. Food Use Link to COVID-19

    Wheat flour production during the first 3 months of calendar year 2020 surged more than 4 percent and nearly 9 million bushels above the same period in 2019. Wheat flour purchases were affected by rising retail demand, specifically demand for family flour (used for home baking), pasta, pan breads, and wheat-based snack products.

    Rising retail demand corresponded with the emerging global COVID-19 pandemic, which led to widespread stay-at-home orders and encouraged consumers to stock up on staples. As some mills and bakeries reportedly operated on extended hours to meet the unseasonably high demand for flour and flour-based products at retail, sales to the food service sector—such as restaurants and institutions, including schools—was notably weaker.

    Domestic Outlook

    Domestic Changes at A Glance:

    • U.S. wheat production for 2020/21 is projected at 1,866 million bushels, down 3 percent from 2019.
      • Based on survey-based data, USDA, National Agricultural Statistics Service(NASS) forecasts winter wheat production at 1,255 million bushels, down 4 percent from 2019 on lower yields and slightly lower harvested area.
    • With smaller production and reduced ending stocks, year-to-year, supplies for 2020/21 are projected down 121 million bushels from the 2019/20 marketing year.
    • Lower projected feed and residual use in the new marketing year, down 35 million bushels, combines with slightly higher seed and food use for a net 3 percent reduction in domestic utilization.
    • Projected record-large corn supplies and the highest wheat-to-corn price ratio since 2014/15 are expected to displace wheat in livestock feed rations.
    • Food use in 2020/21 is up 2 million bushels to 964 million as the gradual re-opening of the economy following COVID-19-related business closures and stay-at-home orders, is forecast to encourage greater consumption of food consumed away-from-home and to combined with still-strong retail sales of flour and flour-based products for a net increase in total use.
    • Wheat prices for 2020/21 are projected at $4.60 per bushel, unchanged from the 2019/20 season-average farm price forecast.
      • An outlook for low corn prices in 2020/21, projected at $3.20 per bushel (versus$3.60 in 2019/20) constrains upward momentum for the wheat price.
    • For the 2019/20 balance sheet, exports are trimmed 15 million bushels this month to 970 million on a slower-than-expected pace and strong price competition from the European Union (EU) and Russia.
    • A surge in retail buying, as consumers stocked up on staples including flour, bread, and pasta, resulted in a record-high wheat food use for the first three months of 2020.
      • On a marketing year basis, the trade-adjusted gains in wheat food use indicated in the NASS Flour Milling Products report help to lift wheat food use in this marketing year up 9.4 million bushels as compared with the same time in 2019.

    Domestic Wheat Supplies Forecast at Lowest Level Since 2015/16 on Smaller Winter Wheat Crop

    In the May 12 Crop Production report, winter wheat production is forecast at 1.25 billion bushels, a decline of 4 percent from 2019—largely on reduced yields—though production changes are variable across the U.S.

    Hardest hit is Hard Red Winter (HRW) wheat production which is forecast down 12 percent from a year ago. In contrast, Soft Red Winter (SRW) wheat production is forecast to rise by 24 percent to 298 million bushels on a sizable increase in planted and harvested area. Lower winter wheat production is combined with the other spring wheat and durum harvests (projected only 5 million bushels lower than 2019) to reduce the all wheat production total in 2020/21.

    At 1,886 million bushels, U.S. wheat production is lower year-to-year but is larger than both the 2017/18 and 2018/19 all-wheat harvests. Declining production in the new marketing year combines with carryin that is estimated to be nearly 10 percent below the 2019 level resulting in substantially smaller supplies, year-to-year.

    Maturity of the 2020 winter wheat crop is currently lagging the average pace. In Kansas, just 39 percent of the crop had headed as of the week ending May 10 compared with the 5-year average of 56 percent. Nationally, 44 percent of the 2020/21 winter wheat crop has headed whereas the 5-year average is 50 percent. W

    inter wheat conditions have fluctuated by region and over time this spring while generally falling across the nation. For the weeks ending April 5 and April 12, the percent of the U.S. crops rated “good” to “excellent” totaled 61 percent. Subsequent weeks saw that total fall from 57 percent to 54 percent, then up slightly to 55 percent before falling to 53 percent for the week ending May 10 (week #19).

    Cold and dry conditions have beset the growing crop, including a notable mid-April freeze event that is reported to have damaged some winter wheat. The percent rated “good” to “excellent” in week 19 of 2020 remains slightly above the 5-year average of 52 percent. However, winter wheat  yields as of May 1 are estimated by NASS at 51.9 bushels per acre, a decline of 1.9 bushels per acre from 2019.

    The first NASS forecast of other spring wheat and durum production for the 2020/21 marketing year will be released in July. Current projections are based on plantings intentions published in the March Prospective Plantings report, 1985-2019 yield trends (except CA, AZ, and Idaho durum) yields, and 10-year harvested-to-planted ratios.

    In the Northern Plains, wet and cold conditions have hampered planting and progress remains slow. Through the week ending May 10, 2020, USDA, NASS reports that 42 percent of the spring wheat crop was planted as compared with the 5-year average (2015-19) of 63 percent. North Dakota, a key spring wheat producing State where 53 percent of the 2019/20 spring wheat crop was sown, has the slowest planting progress.

    The most recent crop progress report indicates that North Dakota farmers had sown just 27 percent of intended acres compared with 56 percent the year prior.

    On May 7, Statistics Canada released their delayed March planting intentions report. Results reflect data that was largely collected by March 16 and thus may be less representative than reports from previous years. Canadian farmers are expected to plant 25.4 million acres of wheat for the 2020/21 marketing year—an increase of a little more than 3 percent from the prior year and the highest in seven years.

    Leading the increase in wheat planted area is a surge in winter wheat plantings—up almost 54 percent year-to-year to 1.43 million acres. Spring wheat area is projected to be about level with 2019 sowings at nearly 19 million acres.

    Durum seedings are up about 7 percent to 5.3 million acres on sustained strong international demand, price strength, and tight North American supplies. Expanded supplies of spring and durum from Canada are likely to pressure U.S. price prospects, where the planting window for spring and durum remains open until as late as mid-June.

    With a smaller-than average share of the spring wheat crop planted, farmers may have increased capacity to adjust planting strategies to accommodate evolving market and sowing conditions.

    Domestic Utilization for 2020/21 Crop Expected to Fall Based on Sharp Cut to Feed and Residual Use

    Domestic use for wheat is the sum of food, seed, and feed and residual use categories. In the new marketing year, modest gains for food and seed use are expected; however feed and residual use is projected down 26 percent to 100 million bushels.

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    Expectations for a smaller wheat crop put downward pressure on the feed and residual figure. However, the outlook for record-high corn supplies and relatively low corn prices—manifested as a very strong wheat-to-corn prices ratio—strongly implies that corn will displace wheat in feed rations. From August 2019 through March 2020, the average difference between the wheat and corn nearby futures contract was about $0.55 per bushel.

    After March 2020, when widespread efforts to contain COVID-19 in the U.S. went into effect and through May 11, 2020, the average difference between the two contracts averaged $1.34—clearly indicative of diversion and reflective of significant and contrasting marketplace changes for the two grains.

    Dry early spring conditions in key wheat production regions around the globe combined with a surge in retail flour and wheat product sales to boost futures and cash prices—a trend that generally continues today and supports the 2019/20 season average farm price forecast (SAFP) of $4.60 per bushel. Stay-at-home orders greatly reduced driving and demand for fuel—10 percent of which is corn-based ethanol.

    The resulting drop in fuel ethanol demand combined with an OPEC-linked expansion of fuel production—creating excess global supplies and greatly reduced demand for U.S. corn for use in ethanol. In contrast to wheat prices, both cash and futures corn prices have weakened significantly in recent weeks and caused the corn 2019/20 SAFP to drop from $3.80 per bushel in March to $3.60 per bushel in May.

    Historically, wheat and corn prices have tended to move together. However, the two grains have experienced very different market reactions following the COVID-19 outbreak. Further there is a divergent outlook for the 2020/21 crops—a marked drop in wheat supplies versus record-high corn production and supplies.

    As a result, wheat prices are expected to be largely insulated from the price erosion that is forecast for corn, though the very low corn price is expected to limit additional gains for wheat cash prices while also serving to alter the mix of corn and wheat in expected in feed rations. The out-year wheat SAFP is projected at $4.60, on par with the current 2019/20 forecast while the 2020/21 corn SAFP is down sharply to $3.20 per bushel.

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