Posted on August, 26, 2024 at 08:54 am
Numbers are falling. Yes, futures prices remain under pressure but spring wheat producers are also dealing with a quality issue called “falling numbers.” Based on conversations with clients this past week, the issue is present across the hard red spring wheat belt of the United States. While this quality issue is largely out of producers' control, it can have a large market impact, which makes it important to understand — especially as it will greatly impact producers' bottom line. It can literally be the difference this year between a net profit or loss. As a market analyst and hedger myself, it's yet another factor impacting our marketing plan going forward.
Falling numbers is a quality issue that stems from weather conditions. Late summer weather was consistently cooler and wetter than many had anticipated across key production areas. As a result, the conditions allowed the wheat kernels to absorb water — the first step in germination. When that occurs before the crop is harvested, the grain heads will start to sprout. As the seed germinates, the starch in the kernel is broken down as food for the plant. This process turns the starch in the kernels into sugar. That's a problem because starch is critical in the production of bread flour — spring wheat's key market.
To assess a sample, an end user, elevator or lab will grind a sample of the grain before creating a slurry mixture of the flour and water. This mixture is put into a test tube with a plunger or rod and inserted into a hot water bath. Initially, the mixture will be able to hold the rod for a period of time before falling through the slurry. The test measures the amount of time it takes for the rod to fall through the starch mixture. Flour millers want that time to be optimally 300 seconds — or higher. Anything less than that will result in an unpredictable consistency. Hard red spring wheat flour is typically used in baking, which makes the starch balance crucial.
Wheat with low falling numbers is discounted because it has reduced value in the baking industry. Flour made from grain with low falling numbers has lower water absorption, reduced mixing strength and forms a sticky dough. Breads made from flour containing lower falling numbers can have lower loaf volume, crust strength and crumb texture. It may also cause loaves to collapse or form holes in the middle. With that, it's clear the issue could have an effect on bakers and millers as consistency and predictability are key to consumers. In turn discounts can be significant.
Interestingly, the U.S. isn’t the only global wheat supplier that may be dealing with quality issues in 2024. Canada, a major competitor for U.S. spring wheat, is likely to have the same quality issues. On top of that, wet conditions have also impacted wheat production and quality in the European Union, Russia and Ukraine. Just remember, the U.S. hard red spring wheat crop is highly sought after on the global market due to its consistent quality. As a result, they may be reluctant buyers at anything less — especially as many typically blend it with another lower quality wheat. That makes them dependent on high quality U.S. wheat, which they are ultimately willing to pay for.
So, why hasn’t spring wheat (Minneapolis wheat) futures responded to this new finding? First, the global market is still able to source good quality 2023 wheat supplies. Remember, for the past couple of years, many U.S. spring wheat producers have benefited from not only high yields but also great quality. Secondly, not all harvested “low falling number” wheat will be made into flour. Some could be sold for livestock feed albeit at a much lower price. It is also a possibility that vomitoxin levels could be high enough in some areas that they could be rejected. With that being said, the spring wheat market could be slow to react until more production and stock numbers are known. However, it may be becoming harder to ignore. The Northern Hemisphere is in the heart of harvest. If low quality wheat becomes a theme, prices will respond accordingly.
At this point, the full impact of these quality concerns could still be months away. We have to make it through harvest first. This time period typically coincides with the harvest low. Looking back at 2019, the last year that our area dealt with low falling numbers , the harvest low was printed at the beginning of September. Over the next month, the December contract rallied over 70 cents. After that, the contract trended lower to retest the harvest low near Thanksgiving before rallying over a dollar higher into the New Year. That doesn’t mean the exact scenario will play out this year, but it does give us hope for better pricing opportunities. Given current discounts and quality concerns leading to lower cash prices at harvest, it wouldn’t be surprising to see a majority of producers decide to store any good quality wheat. If that is the case, basis may be the first to rally to get good quality wheat out of the bin and on the market.
With that, producers need to be ready to pull the trigger as pricing opportunities arise. If grain is being stored at harvest, use rallies to make additional sales. With carry in this market, look at using March or May contracts. If carry continues to build, these contracts can always be rolled which increases your cash prices (as long as the basis is not set). If sales are being made off the combine, examine re-ownership strategies. With the harvest low likely to have been printed or printed in the next couple of weeks, have a strategy in place to stay active in the market. Depending on your risk tolerance, there are numerous options available.
It's crazy how a couple of week’s can quickly change an outlook. At the beginning of the month, the spring wheat crop was expected to have both high quality and yields. While that prospect has been altered, it reiterates the importance of having a flexible marketing plan. Harvest is an unpredictable period and every producer and farm family knows that plans can quickly change. A marketing plan is no different. In my opinion, it should be called a “marketing strategy.” Instead of “sticking to the marketing plan,” “keep developing your marketing strategy.”
Source: AGWEEK