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Cash Market Moves
Wednesday, October 7, 2015 3:35PM CDT

By Mary Kennedy
DTN Cash Grains Analyst

A variety of quality issues in the U.S. soft red winter crop -- including low falling numbers and vomitoxin -- have led to a wide basis spread in cash prices available at domestic mills versus export terminals or feed users.

Soft red winter wheat (SRW) accounts for 15% to 20% of total U.S. production and is grown primarily in the eastern U.S. and in states along the Mississippi River, according to USDA. Flour produced from milling SRW is used in the United States for cakes, cookies, and crackers. China, Brazil and Egypt are among the countries that favor SRW.

SRW is a versatile weak-gluten wheat with excellent milling and baking characteristics, but the U.S. crop this year was not milling quality on average due to poor weather during the growing season and at harvest. The final grade for the 2015 crop reported by U.S. Wheat Associates (USW) was #3 SRW, 11.3% protein, with test weight of 56.9, 3.4% damage and 4.1% total defects. One of the biggest issues with the new crop is pockets of vomitoxin (DON) and poor falling numbers. Falling number indicates how much sprouting or pre-harvest germination was happening in the wheat being tested.

Vomitoxin (DON), is a mycotoxin that infects grain heads when wet weather occurs during the flowering and grain-filling stages of plant development. The FDA advisory for finished wheat products, such as flour, bran and germ that potentially may be consumed by humans, is set at 1 part per million, which makes it more strict for mills when buying.

"Commercial millers are expressing concerns about long-term sourcing of this year's crop with acceptable falling number values and DON results," USW noted. "Blending with old-crop wheat is resulting in wheat with acceptable falling number value currently, but as we move through the crop year, low falling number values could present challenges. The new crop appears to be milling satisfactorily to date for those millers contacted, and they have been able to meet customers' specifications with little negative feedback regarding flour functionality."

Helen Pound, commodity specialist and vice president for Wedbush Securities Inc., Futures Division told DTN via email, "There is a multi-tier market for soft red winter wheat due to large quality differences for SRW grown in different regions. Mills that are not able to source 'milling quality' in their traditional drawing area are forced to pay a high basis 'transportation premium' to draw SRW from great distances. This creates a dramatic difference in prices paid for soft red winter wheat for mills versus for export or for feed. For example, in St Louis the highest bid by a mill is +45 WZ [45 over the Chicago December contract] while the bid by elevators is 85 cents less at -40 WZ. This situation is also apparent in the +30 WZ Toledo mill bid as compared to the Cincinnati elevator bid at -30 WZ."

Another issue is the mixed quality of the SRW delivery stocks. "There is variable quality in SRW stocks located in Toledo futures delivery terminals," said Pound. "Note that there have been WU [Chicago September] futures deliveries in Toledo even though the mill basis is well over futures delivery value (plus load-out and transportation costs). This suggests the quality of this grain is above 'delivery grade' but below 'milling quality.' This could be due to any grading factor, but may be due to small amounts of vomitoxin."

According to Pound, there are also regions where there are large inventories of "deliverable" as well as "non-deliverable" SRW along the Ohio River and the Lower Mississippi River. "Note that there have been Chicago September wheat futures deliveries in these regions that have not yet been moved out. This would seem to indicate that these stocks will remain in storage until after the row-crop harvest is complete and barge transportation into the export market is cheaper. It would seem that the non-deliverable SRW stocks will stay in storage until they can be priced into the feed market."

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow her on Twitter @MaryCKenn


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