How is the 2021 USDA’s Planting Intentions Report Affecting the Current US Wheat Carryout?

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The highly expected USDA’s Planting Intentions report released on Wednesday (also known as the Prospective Planting report) contains the United States Farmers’ planting intentions for the various crops produced in the USA. At the moment, pricing follows the supply and demand rule.  However, the report  has an important impact on a given commodity’s market, and—as it is the focus of this article—on Wheat :

• Decreasing  the current US Wheat trading price changing in light of the report

• Increasing the 2020/2021 US Wheat carryover

• Wheat arbitrage opportunities

Furthermore, this report relies on the intentions of farmers and not actual crop planting or yield. Thus, the 2021 USDA’s Planting Intentions report is a preview of the coming 2021/2022 marketing year and gives an idea of the US Wheat market growth and potential carryout. This can change depending on the weather and inflation, and farmers will probably not follow through with their intentions.

US Wheat Prices is Decreasing with USDA Planting Intentions Report

US Wheat pricing changes throughout the marketing year. In Q3 and Q4 2020, the market rallied in July 2020, as the Winter crops harvest began, all the way through to the end of the year. Following that period, prices vary along with the supply and demand and market events, like the year’s Chinese bull market.

Therefore, the USDA Planting Intentions report gives a rough preview of the coming season and the supply available for the coming marketing year. For the marketing year 2020/2021, the expected All Wheat planted area was down 1% from the previous year with 44.7 million acres; for 2021, this figure is now up 5% from 2020 with 46.4 million acres.

Regarding US Wheat prices, winter Wheat crops represent the major part of US Wheat crops and quotes. As such, Hard/Red/Winter and Red/Soft/Winter are the products with the most data and represent the US Wheat market best.

Figure 1: US Winter Wheat Quotes Between July 2020 to March 2021

According to AgFlow’s Winter Wheat data in Figure 1,  the market rallied from July 2020 until October 2020  but then corrected throughout the end of the year. Even with the prices increasing in early Q1 2021, the Wheat prices fell down to their December 2020 level in March 2021. Additionally,  with the release of the 2021 USDA Planting Intentions report, Winter Wheat prices will probably continue to tank with the expectation of larger Wheat quantities for the next crop.

The price basis was reconstructed using the Hard/Red/Winter cash quotes and corresponding futures prices as they are the most sought after. Units are converted into USD/mt.

Figure 2 shows that the basis decreases since November 2020, and that stakeholders share a weakening interest in Wheat products, probably linked with the winter frost and the recent floods in the south and plains area from January 2021 to the end of March 2021, which potentially decreased the grains quality. Thus, ahead of the 2021 USDA Planting Intentions report, traders are looking for arbitrage opportunities, probably expecting lower Wheat quality in the coming season.

However, the USDA report features planting intentions being  higher than the previous marketing year, and shows farmers’ confidence in the new crops. This increase in planting intentions is perhaps also due to the rally in Q3-Q4 2020, which perhaps enabled farmers to hedge forward their intentions.

Furthermore, the Minneapolis Grain Exchange’s data, which seems more reliable in this case, shows an increasing basis price in the report’s light. As such, futures prices are losing momentum, and cash prices rule the US Wheat market still.

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Will the USDA Planting Intentions Report Increase the 2020 Wheat Carryover?

With stakeholders looking for arbitrage opportunities, the demand for Wheat stocks can vary. The carryout plan can then change as an increase in demand can reduce the carryover or even stop it, affecting the 2020 carryout elasticity.

Figure 3 displays the total Wheat export volume per month. The line represents how the export Wheat stocks (according to WASDE 2020/2021 SnD data) decreases with exports. With the increase in demand, March 2021 shipments reached a 5-month high, i.e. a 9% increase from the previous month.  After conducting several calculations based on the assumption that a similar increase will be visible until the end of the marketing year, demand is still not high enough to liquidate the Wheat stocks entirely.

Moreover, although the demand increased, the perspective of higher Wheat yield from the  2021 USDA Planting Intention report will probably drive the price down. As such, this trend will not necessarily continue.

As of now, the 2020/2021 Wheat stock will carry over into the next marketing year,  and the data seems to follow the carryout elasticity estimations. 

Thus, the USDA Planting Intention report will perhaps produce a positive delta, meaning that the carryover will perhaps be more important than expected by about 4% or 256kmt.

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Highlights

The USDA Planting Intention report has a significant influence on the US Wheat pricing and demand and has led to:

• A decrease of the price of US Wheat below $260/mt for Hard/Red/Winter Wheat
• An increase of  the US Wheat Basis on March 31st 2021, meaning a recovered interest for these products
• A likely 4% increase of the 2020/2021 US Wheat carryover into the new marketing year

In all probability, stakeholders will want to wait as Wheat prices decrease with the hope of more important Wheat crop yields. The declining demand will probably lead to lower shipment volumes and a larger carryover in the next marketing year. Nonetheless, the declining prices  – from the perspective given by the 2021 USDA Planting Intentions report – rely on larger Wheat quantities planted. Yet, the yield still sits in limbo, and prices are likely to change and perhaps increase anew, leading to price arbitrage opportunities arising.

The 2021 USDA Planting Intention report only provides what US farmers have the intention of planting. Still, it is not predictive and does not fully translate into actual planting as a one-to-one relationship. As such, the weather conditions in the coming months can and will change how people are using the end of 2020/2021 Wheat crop. Furthermore, not all the world Wheat supply rests in the US farmers’ hands, and looking for other primary Wheat origins is crucial to hedge positions and search for better opportunities.