Spring wheat futures under pressure as protein loses value

Harvest pressure is pushing the spring wheat market lower as combines roll across the northern Plains and southern Prairies.

The U.S. spring wheat harvest is 41 per cent complete as of Aug. 16, which is seven per cent ahead of normal.

North Dakota, the largest producing state, is 37 per cent harvested, which is 13 per cent ahead of normal progress.

The advanced state of the spring wheat harvest indicates that the pressure on both futures and cash prices will begin to wane by the end of the month.

The Canadian harvest is just beginning in the southern Prairies with less than one per cent of the crop in the bin as of the week ending Aug. 10. The Canadian spring wheat harvest will be the primary source of harvest pressure into the middle of September.

Production estimates unchanged

Production estimates for the spring wheat crop have remained largely unchanged over the past month.

The U.S. Department of Agriculture’s August crop production report left HRS production largely unchanged at 434 million bushels, and total production at 1.53 billion bu.

Global wheat production was lowered by 670,000 tonnes to 819.3 million tonnes.

The USDA did increase Canadian production by one million tonnes to 35 million tonnes. This estimate includes durum and wheat crops. Markets did not react to the changes in the USDA numbers last week.

Protein prices collapse

Spring wheat markets have been trading sideways since the first week of August, while winter wheat futures have moved back close to the July highs.

This has created a large spread between Minneapolis and Kansas City futures with the December Kansas City futures trading at 55 cent per bu. premium to spring wheat.

In normal years, spring wheat should trade at a premium to HRW wheat. The current year is certainly an anomaly when it comes to wheat spreads.

The reason that spring wheat futures normally trade at a premium is the difference between protein levels between the Minneapolis and Kansas City contracts. Usually higher protein levels garner a higher price, but this year wheat protein has little or no value. That is not good news for protein premiums this marketing year.

This is illustrated by current cash prices in the Pacific Northwest, where spring wheat is currently priced at a US$25 per tonne discount to HRW wheat that contains two per cent less protein.

There is a slight premium for higher protein levels of spring wheat, but that pales in comparison with the discount between HRS and HRW wheat.

How long can the protein discounts last?

Spring wheat futures have been trading at a discount to Kansas City contracts since the middle of June. This is the longest stretch of negative spring wheat spreads to Kansas City wheat since 2014.

The bad news is that spring wheat futures spent most of the 2014 calendar year trading at a discount to Kansas City wheat. Expect the discounts for spring wheat to continue in the coming months, but they should narrow from the near record levels.