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ANALYSIS: Soft red winter wheat's premium pricing looks sticky

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Soft red winter wheat just won’t give up its premium.

 

Prices of the grain, the wheat class traded in Chicago, might have been expected to underperform given a larger US harvest this year.

 

The ongoing US winter wheat harvest will end up with 280.3m bushels of soft red winter wheat (SRW), an increase of 17.2% year on year, compared with declines in all the other main wheat types, including a 14.8% drip to 710.3m bushels in the key hard red winter wheat (HRW) crop.

 

Yet SRW has not only managed to hang on to its premium over HRW – which as the higher protein variety is typically the one which enjoys the higher price. It has expanded it.

 

Priced to stay

The premium topped $0.90 a bushel last week, September basis, up from $0.52 a bushel at the start of the month.

 

Against corn, the SRW premium has jumped from $1.50 ¼ a bushel coming into July to $2.07 ¾ a bushel as of Friday.

 

Nor is SRW’s premium evident only in the futures market.

 

The International Grains Council reports the price of US SRW as of Thursday at $237 a tonne, up $26 a tonne so far this month, and overtaking HRW, for which the export price of $221 was up $6 a tonne for July.

 

Geographical twist

As to why SRW has a premium, at least in Gulf ports, that is being seen as down to two factors, the first being geographic.

 

“The recent harvest did little to improve exportable supplies of SRW,” said US Wheat Associates, noting that crops in Illinois and Missouri, key sources of crop for export, missed out on the overall harvest increase.

 

The Missouri crop held at 24.57m bushels, with the Illinois one down 7.7% at 34m bushels.

 

US Wheat Associates, which promotes US wheat exports, quoted a trader saying that “we don’t have abundant supplies up and down the Mississippi River and rail rates are just too high for it to make sense to pull SRW supplies inland from the Midwestern states”.

 

Wheat vs corn, soybeans

The second is down to a squeeze in port space, given enhanced US export programmes of corn and soybeans, fuelled by Chinese buying.

 

Another source told US Wheat Associates that “a lot of customers are surprised by the fact that export capacity is filling up so quickly with soybeans”.

 

(Although, in terms of actual exports, it is actually corn which has been the bigger deal of late, with total US shipments for the past five reported weeks at 5.90m tonnes, up 74% year on year.)

 

Demand destruction?

The question now is whether SRW’s squeeze will last.

 

The US Department of Agriculture forecasts the US ending 2020-21 with inventories equivalent to 35% of total use, holding onto the tightness instilled in 2019-20, and remaining more scarce than HRW, with its stocks-to-use ratio of 52%.

 

Sure, it is easy to imagine that the capacity battle might deter some SRW exports, and its price premium prompting extra livestock feeders to transfer demand to less expensive wheats, or to the likes of corn.

 

After all, US SRW export commitments for 2020-21 so far are, at just under 820,000 tonnes, down 14% year on year.

 

However, the USDA is already factoring in, at 292m bushels, the lowest consumption of SRW (domestic demand and exports combined) on data going back 36 years.

 

There is certainly scope for the SRW to lose some buoyancy. But it looks like it may be some time before it is overwhelmed, and reverts to more typical pricing against its peers.

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