(Laura McKenzie/Texas A&M AgriLife Marketing and Communications)
The wheat market has given excellent pricing opportunities during these last months. Today we will focus on those variables that were and are influencing this market. These factors have contributed to the high price premiums we have seen lately.
6/21/2022 – Range Management Program, Pampa
6/22/2022 – I40 Beef Seminar
6/27/2022 – 2022 Texoma Youth Cattle Short Course, Henrietta
7/6/2022 – Online Drought Management Series, Early Weaning and Vaccination Programs, Amarillo
7/27/2022 – Online Drought Management Series, Supplementation Decisions, Amarillo
8/1-3/2022 – Beef Cattle Short Course, College Station
What We’re Reading
USDA to invest up to $65M in pilot program to strengthen food supply chain – Morning Ag Clips
Should farm bill programs protect margins? – Feedstuffs
Red meat and poultry production forecast raised – Feedstuffs
Nutrien Will Boost Fertilizer Production Capacity as Prices Soar – Bloomberg
Cropland prices up 20% this year – Farm Progress
Range management during drought webinar set June 21 – AgriLife Today
Wheat Market Update – ARC/PLC
Wheat market prices have shown significant volatility these last months (Graph 1). Locally, lack of rainfalls and low-level ending stocks are still driving today’s wheat market. Worldwide, lower ending stocks and the invasion of Russia to Ukraine have been determinants in this bullish market. 2022-23 World wheat projected production in the southern hemisphere has also been tempered by high production costs and non-favorable weather like in Argentina. Producers in Texas are coping with high production costs and low yields. These two variables together have reduced margins and increased risk to unprecedented levels. Further, the probability of triggering PLC or ARC payments is very low this year, considering these unparalleled wheat market prices.
Graph 1: KC HRW July 2022 Contract. CBOT
WASDE Report (June)
USDA increased their winter wheat yield projections in the latest WASDE Report (Table 1). Total use, feed, food, and exports projections were similar to last month. Stocks over total use ratio increased by 1.32%.
Table 1. USDA WASDE 2022-23 Wheat Projections.
The WASDE report projected a slight increase in the wheat area planted and a small decrease in the harvested area compared to last year. In turn, it calculated a higher yield. Remember that part of this yield considers a good spring wheat yield (Table 2). WASDE estimates a higher wheat production than last season and lower final and carryover stocks for the U.S.
Table 2. US Wheat Supply and Demand (Source: WASDE)
A few important outcomes from these projections. First, 2022/23 ending stocks and carryover will still be low next year, even lower than the 2021/22 season. The risk of lower yields would potentially result in ending stocks much lower than in recent years.
The harvest progress in Texas is 53% and in the United States 10%. The U.S.’s most productive winter wheat areas register a small harvested area so far. Domestic crop wheat conditions remain very unfavorable and well below last season. Excellent and good crop wheat conditions were 48% during 2021-22. This season, the U.S. winter wheat excellent and good crop conditions are only 31%. In Texas, excellent and good crop wheat conditions this season are 6% (25% in 2021-22).
Graph 2. Winter Wheat Crop Conditions.
Worldwide market drivers.
USDA estimated the world’s wheat production is just 0.7% less than last year (Table 3). Higher wheat production projections for Canada, Russia, the United States, and other wheat-producing countries offset the significant reduction in Ukraine’s production (35%).
Table 3. WASDE World Wheat Projections
World wheat ending stocks continue to fall. Total world domestic use projections are higher than production projections like last year. World wheat carryover percentage is still higher than in 2008-09 or 2012-13. However, the World Wheat Less China carryover percentage is well below the minimum we have seen since 2008 (Graph 3). China is one of the largest wheat producers and importers.
Graph 3. Word Wheat Carryover Estimates.
In season winter wheat conditions are favorable worldwide except for the U.S. and Ukraine, which are poor (Graph 4). Australia and Argentina have started planting their 2022-23 winter wheat season. While Australia has favorable conditions, limited soil moisture in Argentina has slowed down planting and reduced the projected planted area.
Graph 4. Crop Synthesis Conditions. Source: Global Agriculture Monitoring – GEOGLAM.
The USDA reported world prices lower than U.S. wheat prices (Graph 5). Our competitors’ FOB wheat market prices have shown significantly lower prices since March 2022.
Graph 5: International Daily FOB Export Bids. Source: USDA- Grain: World Markets and Trade
The Niña ENSO weather event, Ukraine’s production uncertainty, an increased risk of geopolitical turbulence, high production costs, plus lower ending stocks in the U.S. and worldwide are the main drivers in this market. These factors have contributed to the high price premiums we have seen lately. On the other hand, lower wheat prices from our competitors might decrease U.S. exports and put a ceiling on wheat prices.
Expected ARC-PLC Payments.
The chances of triggering ARC PLC payments this year are still meager. The reference price of wheat ($5.5/bu) is much lower than the expected next season. As of June 10, 2022, USDA-NASS projected a marketing year wheat price of $10.75/bu. The probability of having a marketing year average price of less than $5.5/bu is extremely low.
The average wheat price to generate and ARC payment should be less than $4.7/bu, given 2022 guaranteed revenue for Districts 1 and 3 (Table 4). The table below also shows the expected drop in yields required to trigger an ARC payment, depending on market prices. For example, for an average market price of $9/bu, yields should be 53% lower than the 2022 benchmark yield for your county. For market prices of $10.75/bu, the yield should drop below 44% of the 2022 benchmark county yield. Similarly, for a price of $12/bu, the yield should be lower than 39%.
Table 4. ARC-CO Estimated District Summary
The Agricultural & Food Policy Center at Texas A&M University has developed a 2022 ARC-CO/PLC Decision Aid (https://www.afpc.tamu.edu). This decision aid will help you understand how your choices under the 2018 Farm Bill may affect your FSA payment based on your decisions and farm history.