Drought Taking Its Toll on HRW Crop

Hard wheat prices soar to 10-year highs. Compiled by staff

Published on: Jul 17, 2006

USDA updated its hard red spring wheat crop condition ratings this week, confirming that the drought that decimated the hard red winter wheat crop in the Southern and Central Plains has also spread north, says U.S. Wheat Associates market analyst Joe Sowers.

Australia and Argentina also are suffering from drought conditions, taking world hard red wheat prices to their highest levels since July 1996.

HRS condition ratings by USDA's National Agricultural Statistics Service have declined every week for nearly two months, with 42% of the crop now estimated in good to excellent condition compared to 78% this week last year. The poor growing conditions have led NASS to forecast a decline in HRS production exceeding 42 mbu (1.1 MMT) from last year to 425 mbu (11.6 MMT), 9% lower than last year and 18% below 2004/05. The forecast average yield is 33 bushels/acre compared to 37 bushels last year. More than 90% of the U.S. HRS acreage is planted in North Dakota, South Dakota, Minnesota and Montana where production is forecast to fall by 9% (20 mbu), 18% (12 mbu), 13% (9 mbu) and 2% (2 mbu) respectively.

This month NASS left its HRW production forecast unchanged at 660 mbu (18 MMT), down 29% from 930 mbu (25 MMT) last year. With more than 70% of the crop harvested, including all of the crop in the two largest HRW states of Kansas and Oklahoma, perhaps the worst has been realized in the Southern Plains.

Although harvests in the southern hemisphere are months away and may still be aided by favorable weather, USDA's World Agricultural Supply and Demand Estimates released last week supported reports that severe drought has reduced plantings in Australia and Argentina. The WASDE forecast for Australian production was revised down from 24 MMT to 21.5 MMT. "This revision for Australia combined with 1.2 MMT shaved from the Argentine production forecast last month and the dramatic decline in U.S. production has caused concern over the availability of global exportable hard wheat supplies this year," explains Sowers.

It is anticipated that HRS and HRW prices will "ration" supplies, Sowers explains. Minneapolis HRS futures closed Wednesday at $5.38/bushel, up 53% from $3.51 a year ago. Although basis prices have dropped, the14% protein HRS basis in Duluth is $0.47 last week compared to $1.25 in July 2005, FOB cash prices are still 25% higher than a year ago. The HRW futures in Kansas City, at $5.09/bushel on Wednesday, are 51% higher than the $3.37 close in July a year ago. The HRW basis for 12% protein HRW Texas Gulf is similar to last year at $0.76/bushel compared to $0.70 a year ago. Therefore, HRW FOB GULF export prices are 43% higher than a year ago, severely limiting export demand. Currently, HRW export sales are down 40%, 953 TMT behind last year's pace, he adds.