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Wheat Lives!
Alan Brugler 1/12 5:20 PM

"The report of my death was an exaggeration." -- Mark Twain

Back in 1897, Mark Twain was in London as part of a multi-year European tour and had not been heard from for a while. That led to rumors that he was ill and/or dead. Upon being told of reports that he was dead, he issued the response above. A similar thing happened to the U.S. wheat industry, circa 2018. It has been ill for quite a while, with almost annual declines in planted acreage.

There were several articles in the ag media in the past week positing that USDA might find the smallest winter wheat plantings since Twain's era (1909 at 29.196 million acres). A funny thing happened on the way to the obituaries, however. USDA found that more winter wheat had been planted last fall than the trade expected.

The report Friday showed 32.61 million acres planted. That was in fact down from last year, but more than 300,000 acres larger than the average trade guess and above all published trade guesses. This was the first time since 2012 for the USDA figure to be larger than the average trade estimate. It was only the second time since 2000, with the other being 2011. Futures had big fall rallies in both 2011 and 2012, which you might expect would result in a production response. This fall we were grinding lower. So what happened, and are there any implications?

First, let's note that winter white acres were just a smidge above last year and within the range of statistical error and subsequent revision. The January winter wheat acreage numbers are never final, even though they should be in terms of planting date. USDA frequently tweaks them.

Why is soft red winter (SRW) up from last year? And why was hard red winter (HRW) down only about 330,000 acres when the Southern Plains area was already dry and expected to see La Nina drought over the winter? There are a couple of possibilities.

First, last year's acreage drop may have been larger than producers really intended for rotation purposes, particularly in SRW country. Soybean harvest progress and fall weather can put you in a situation where you just aren't sure you can get a stand before winter. There may have been a rebound effect.

I think the primary driver was the rally in Minneapolis spring wheat back in June and July, just a little ahead of winter wheat planting. The rally accomplished a couple things.

1. It showed that wheat could rally more than $1 per bushel even with record-large global carryover. If it happened last year, it can happen again next year.

2. It showed that the other classes would rally in sympathy or because of knock-on effects. Tight HRS supplies created big premiums for what little high-protein HRW wheat existed, and the market knows there will be no more HRS until well after the HRW crop is harvested and could potentially fill that void. Texas, usually the first to harvest, is showing about 300,000 more acres than last year. Despite the dryness and slow planting pace, Kansas producers managed to get an extra 200,000 acres planted compared to a year ago.

3. SRW producers have been making money double-cropping soybeans after wheat. Double-crop bean acres were down in 2017 because SRW acres were down. If you want to play that game, you have to plant the SRW. Nearly all of the SRW states saw larger acreage in this year's report.

While heavily influenced by the jump in spring wheat prices, let's not overlook the higher average cash wheat price this year versus last year. WASDE's mid-point is $4.60 this year versus last year's average of $3.89.

What are the implications of this larger-than-expected winter wheat acreage? The market clearly didn't like it, with all three classes dropping more than 10 cents per bushel after the report came out.

The slow export pace is well known, and USDA again had to boost both Russian 2017 production and Russian 2017/18 exports. Russia also will have near-record ending stocks as a cushion for 2018 production and exports. The world milling industry needs more high-protein wheat, but doesn't need more generic wheat unless a few more countries suffer Australia's fate (30% production drop in one year).

Of course, we also have to remember that planted acres do not equate to harvested acres, and 2018 yields are far from certain. Over the past 10 years, only 78% of the planted HRW acreage has been harvested for grain, with the balance either grazed out or abandoned. The SRW average is 84.5% harvested.

Bulls will point out that there was almost certainly some winterkill from the New Year's weekend cold snap with its subzero temperatures and lack of snow cover. Other wheat bulls will point to the Drought Monitor and the lack of rainfall since November in big chunks of the Plains. Bears just have to point to the world stocks and ask the market to prove it can move the inventory.

USDA Actual Avg of Trade Estimates 2017 Final Acreage
All Winter Wheat 32.61 31.30 32.67
HRW 23.10 22.34 23.43
SRW 5.98 5.57 5.73
Winter White 3.56 3.44 3.54

Alan Brugler can be reached at alanb@bruglermktg.com

(AG/)

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