As I’ve said many times over the last couple months, everything we do from here on out constitutes a “new normal”. A case in point is last week’s Kansas wheat tour, an event that usually occurs in early May and consists of dozens of participants driving around the state on well-worn routes to measure, calculate, and guess total wheat acres planted and expected production. Though I never went on the tour itself, I’ve known a number of folks who have, often returning with humorous stories to tell. A couple that come to mind: A good friend of mine and reporter for the newsroom I worked in went on his first Kansas Wheat Tour. After my telling him stories of how dry Kansas normally is, his car got out to check a field in central Kansas and was immediately swarmed by hungry mosquitoes. Another found a young reporter, also from the newsroom, on his first romp through the heart of Wheat Country, was touring a flour mill in St. John, Kansas. It was then his allergies to wheat dust kicked in. And so on.

But last week’s tour was titled the 1st Annual “Virtual” Wheat Tour as it was done largely online. I’m not sure of all the particulars on how it worked, I need to visit with a good friend of mine at the Kansas Wheat Commission for more details, but in the email he sent out last Friday the results were: 6.8 million acres planted with 6% abandonment, a 44.5 bpa average yield, putting production at 284.4 mb, the last item a rough 54 mb decrease from last year’s reported production of 338 mb. What does this mean for the Kansas City hard red winter (HRW) wheat market? Time will tell, but as of last Friday the market seems to be chugging along with its own ideas of supply and demand.

The July Kansas City futures contract closed lower last week, down 7 3/4 cents from the previous Friday’s settlement with its closing price of $4.44 1/2 putting it in the lower 14% of its price distribution table of weekly closes for July KC futures dating back through the 2016 contract. Additionally, the contract is now in position to test the previous low on its weekly chart of $4.27 1/4 (week of March 16) and possibly its contract low of $4.19 (week of September 2, 2019). Another interesting point is the 2020 contract closed less than 3 cents above the 2019 contract for the same week a year ago, despite the projected 16% decrease in production by the nation’s largest HRW producing state (FWIW: The 2019 Kansas Wheat Quality Council Crop Tour resulted in an average yield estimate of 47.2 bpa and total production of 306.5 mb, meaning USDA’s final production estimate grew by another 31.5 mb.)

The real indicator of the market’s view of HRW (or any crop’s) fundamentals is on its cost of carry table. Here we see something different than what the Virtual Tour showed us, and startlingly counter to USDA’s “initial” 2020-2021 supply and demand numbers in its May 2020 monthly report. There, if you recall, the bottom line of all wheat ending stocks (with HRW being the largest class of wheat grown in the United States) came in at 909 mb, down 69 mb from its latest guess of 2019-2020 ending stocks (for all wheat). In other words, USDA sees a tighter supply and demand situation over the next marketing year that begins as we turn the calendar page from May to June this coming weekend.

Again, though, the market is showing us something far different on the cost of carry table for HRW wheat futures. First, what is cost of carry? It is the total cost, storage plus interest, for holding a cash commodity in commercial storage. Once we find out what this total cost for a set time frame is, we can calculate the percent of calculated full commercial carry a futures spread is covering. After that we apply a table I built decades ago (for simplicity’s sake) with 33% or less considered bullish, 67% or more considered bearish, and 34% to 66% varying degrees of neutral.

At Friday’s close the Kansas City July-September spread was at a carry of 7 1/4 cents, with full commercial carry calculated at roughly 12 cents. This means the initial 2020-2021 marketing year futures spread was covering roughly 60% of calculated full commercial carry, a neutral-to-bearish (but leaning more toward the latter) reading. However, the July-December spread was showing a carry of 19 3/4 cents with full carry calculated at about 29 3/4 cents, meaning the spread was covering roughly 67% (bearish) of full commercial carry. Lastly, if we look at all the 2020-2021 futures contracts together, from July 2020 through May 2021, we see the marketing year forward curve with a carry of 38 1/2 cents while full commercial carry is calculated at 59 cents. This means the carry of the forward curve sits at 65%, on the cusp of reflecting a long-term bearish view of new-crop HRW wheat supply and demand.

Some of you may be asking, “How can the market be growing more bearish while prospects for production in Kansas continue to decrease, partly due to reduced acres?” The answer is the market is measuring all of supply and demand, with Kansas production just one factor of many. As for that production figure itself, it will change. It always does. As the computers were being put away following last week’s initial virtual tour, storms were rolling over parts of the U.S. Southern Plains lasting for much of the 3-day holiday weekend, immediately revising yield prospects.

Factors affecting supply and demand are always changing, making guesses on anything in particular (yield, production, various categories of demand) merely snapshots of a point in time. The cost of carry table, though, is always updating to the latest developments, providing us a clearer picture of real fundamentals as these changes (both natural and unnatural) occur.

Until next time,

Darin Newsom