From U.S. Wheat: U.S. HRW Wheat Value is Peaking

September 18, 2009 Bookmark and Share

Vince Peterson, USW Vice President of Overseas Operations

In the midst of volatile markets and the daily economic battles, it can be very easy to overlook one significant benefit that the market is now offering all wheat buyers: the best landed-cost value for wheat the world has seen in several years.

Considering price in relation to quality, performance and service, there is no doubt that value is peaking when we look at the situation with hard red winter (HRW) — the largest and most versatile class of bread wheat produced in the U.S.

Despite the fact that Mother Nature challenged individual HRW sub-regions, the U.S. has produced a crop that begins the marketing year with total HRW supply of 32 MMT when combined with ample carryover stocks. That is the same amount available to the market during the world-record 2008/09 crop. Not surprisingly, U.S. exports to date are running behind last year’s pace, but there are important comparisons. First, last year is early pace included accelerated sales to Iraq and significant new sales to Iran. Additionally, the high prices and volatility in 2007/08 likely encouraged many buyers to push ownership coverage ahead into the 2008/09 new crop period as insurance against any unforeseen return to earlier, untenable price levels. Pressed with a corn and soybean harvest that is not far off, storage facilities are filling up and HRW wheat prices remain under pressure.

On a straight FOB basis, Gulf HRW export prices are now back to pre-2007 commodity panic levels. Beyond FOB prices, ocean freight has dropped precipitously since oil prices slid from the nearly $150-per-barrel highs. Because of a weakened dollar, HRW US$ C&F prices give a huge advantage to today’s effective landed prices when plotted against the currencies of many primary HRW export markets.

The following table lays out a HRW price matrix including FOB basis and the flat price in US$/MT. It then adds a basket of average freight rates for routes from the Gulf to both east and west coast South America, the Gulf to the Mediterranean, and from PNW to Japan to arrive at a hypothetical, average C&F price (HRW C&F $’s). We then convert those into local currencies in five sample markets. In all cases, current HRW prices at landed costs, in local currency, are at their lowest basis and flat price levels of the past four years. Many other countries fall into similar cost patterns, and in almost all cases, current prices are a “value” compared with anything since mid-2006 to early 2007.

(Click here for the table.)

With the most recent collapse in wheat prices, particularly when benchmarked against corn and soybeans, we expect winter wheat planting intentions will be lower. As low wheat prices begin to impact grower planting decisions worldwide, logic would say wheat buyers would take advantage of such opportunities. In turn, a brisker export pace would provide some leadership to future market direction.

In addition, here is some icing for the cake: finance rates down. To the extent that operating capital continues to grow, the cost of carrying inventories is also at levels not recently seen.