Spring wheat market roller coaster

Spring wheat has been on a roller coaster, rallying on crop concern this summer and falling this autumn when crop size improved.

In the past month, elevator price discovery had little to do with futures and everything to do with local basis and protein premiums and discounts.

In the past month, elevator price discovery had little to do with futures and everything to do with local basis and protein premiums and discounts, the latter having just reached eight cents per bushel for one to 10 per cent protein variance in each direction. World buyers won’t see that, but this is unique to the Western Canada elevator price grid and first-time-transparent in open market.

Protein variance

While a normal Western Canada red spring wheat protein distribution lugs a 13.5 per cent average, this year’s might be high 12’s and rival that of 2013. In a normal year, protein variance might be heavily concentrated within 0.5 per cent of the mean. This year, not only is the mean lower, the distribution is much wider dispersed. Pockets of variability are immense.

The job of the market is to create usable blends of milling spring wheat with 13 to 13.8 per cent protein. As such, lofty high protein elevator bids lug a blend-value, not raw consumptive value. This involves incentivizing overweight deliveries from those who have protein, and incentivizing underweight deliveries from those that don’t. Basically, manufacture market readiness. 

Keep in mind that core 11 to 12 per cent Canada Western red spring wheat protein is essentially valued at a hard red winter substitute. If demand needed to exclusively occur as a HRW substitute, respective discounts for that type would need to intensify. That so far hasn’t occurred because incremental demand for lower protein is still at a blend value.  

Farmers content to store

With low protein wheat prices soft, farmers appear content to store, and believe will store into 2018 or 2019 unless market conditions change. This would need to be a flat price rally driven by 2018 adversity concerns. This means some supply will not become market-available until it is blended-up in 2018. 

The uniqueness of today’s situation is this: It’s an open market. Driven by consumer need, the goal of market is to manufacture as much 13 to 13.8 per cent protein as can economically occur. The market forces determine how much trades, how it is done relative to supply and demand, and farmers play a leading role, more than grain companies.

Within the confines of logistics, grain companies are content on moving any commodity that generates margin. The mechanic to manufacture 13 to 13.8 per cent protein in elevator space is protein premium and discount where farmers see 100 per cent of it in real-market time. 

Bottom line

The market creates usable blends of milling spring wheat with 13 to 13.8 per cent protein, encouraging overweight deliveries with protein, and at the same time, incentivizing underweight deliveries without protein. Pockets of variability are immense.

Greg Kostal of Kostal Ag Consulting Ltd provides insight on commodity markets and marketing guidance. For more information, please visit www.gregkostal.com.