Hot, Dry Weather Threatens Global Supply Of Top-Quality Wheat

Heads of wheat and unprocessed wheat grains (Triticum species) Image source: britannica.com

Droughts are shrivelling high-quality wheat crops across the globe, sending prices to multi-year highs as bread makers scramble for supplies.

Reuters report continues:

High-protein wheat has emerged as the one tight spot in a global grains market swamped with abundant stocks after four years of bumper harvests.

Low prices had already discouraged U.S. farmers from planting wheat, and dry weather is now exacerbating the shortage from North America to Australia.

In Europe, a drought threatens to reduce cereal production in Italy and parts of Spain to its lowest in at least 20 years. Canada's Alberta province, another top wheat producer, is also suffering from unusually dry weather.

"The million-dollar question that the trade is still trying to figure out is, of all the global supplies out there, how much is going to be high-protein wheat?" said Terry Reilly, senior commodity analyst with Futures International in Chicago.

WANTED: HIGH-PROTEIN WHEAT

The world is awash in lower grades, with the U.S. Department of Agriculture projecting world wheat stocks at the end of the 2017/18 marketing year at a record high of 260.6 million tonnes.

But flour millers and bakers need milling wheat, often with a protein level of 12 percent or higher, to make consistent bread.

U.S. spring wheat, typically with a protein content of 14 percent or higher, is also used for blending with lower grades of wheat. Spring wheat usually commands a premium over the lower quality grades

The United States is the world's biggest wheat exporter. Latest estimates from the USDA put U.S. production of spring wheat other than durum, which is used for pasta, at 423 million bushels, the smallest since 2002.

Wheat futures on the Chicago Board of Trade hit two-year highs earlier this month above $5.50 a bushel, while values on the Minneapolis Grain Exchange - a niche market for high-protein spring wheat - spiked above $8 a bushel for the first time in four years.

Market direction will depend now in part on how the spring wheat crops in the United States and Canada, which typically have high protein levels, finish the growing season, and whether Australia's drought persists.

Next week, the market will find out how bad the damage is to wheat fields in North Dakota, by far the biggest U.S. spring wheat producer, when industry experts and farmers conduct an annual crop tour.

Drought and searing heat has scorched crops in the western portion of the state, but crops along the eastern border and in neighbouring Minnesota so far have escaped major damage.

The impact of weather problems is magnified because wheat plantings in the United States for 2017 were the smallest in records dating to 1919, reflecting low prices that prompted farmers to plant other crops including soybeans and corn.

AUSTRALIA OUTPUT EXPECTATIONS CUT

Due to the outlook for little soil moisture, traders and analysts are also cutting expectations for Australia's wheat production by 20 percent below official estimates.

"The market is beginning to factor in a crop of between 19 million to 21 million tonnes," said Matthew Pattison, trading manager at Nidera, the grains trader acquired this year by China's COFCO Group.

That compares with Australia's chief commodity forecaster in June pegging wheat output at 24.1 million tonnes.

Should Australian exporters have less wheat to ship, Indonesian and South Korean millers will be forced to turn to supplies from the Black Sea, where production has been aggressively expanded in the last decade.

Australia has steadily lost market share in recent years, especially to Russia, and analysts fear there could be a permanent shift away from the world's No. 4 exporter.

A shortfall in the U.S. spring wheat crop could bolster imports of Canadian spring wheat, said Jay O'Neil, an agricultural economist with Kansas State University.

Not everyone is facing shortages of high-quality wheat, however.

China has increased output of better quality wheat significantly this year, and that could cut its demand for imports from major suppliers like the United States and Australia.