Market Advisor: When will spring wheat protein discounts soften?A common question asked at outlook and marketing club meetings, plus coffee shops, is when the spring wheat protein discounts will soften. While no one can predict the future, history can provide a basis for comparison and may provide some insights into common market patterns. History suggests that protein discounts and premiums will not significantly change until the 2010 spring wheat harvest.
By: Frayne Olson, NDSU Extension Service, INFORUM
A common question asked at outlook and marketing club meetings, plus coffee shops, is when the spring wheat protein discounts will soften. While no one can predict the future, history can provide a basis for comparison and may provide some insights into common market patterns. History suggests that protein discounts and premiums will not significantly change until the 2010 spring wheat harvest.
Information on historical spring wheat protein premiums and discounts for local markets in North Dakota is not available publically. However, the U.S.
Department of Agriculture's Agricultural Marketing Service (AMS) collects price information for selected terminal markets in the United States. One of these terminal markets is at Portland, Ore., which is a major market of North Dakota spring wheat. The AMS report provides daily market prices for 13 percent, 14 percent and 15 percent protein spring wheat. Protein discounts and premiums can be calculated from this information.
An analysis of the calculated daily price discount for 13 percent protein hard red spring wheat delivered by rail to Portland, Ore., from June 1, 2004, to April 9, 2010, shows that there is a tendancy for rapid adjustment in discounts within a short time. The discounts either increase or decrease during the spring wheat harvest. After the harvest, the discounts fluctuate within a relatively narrow range until the next spring wheat harvest.
For example, the discount for 13 percent protein spring wheat was approximately 10 cents per bushel from June until mid-August 2008. However, the discount rapidly adjusted from 10 cents per bushel to approximately 75 cents per bushel from mid-August until mid-September 2008.
The discount varied within 20-cents-per-bushel range until the beginning of September 2009. At that time, there was another rapid adjustment to an approximately $1.40-per-bushel discount by late September. The discount has fluctuated within a 25-cents-per-bushel range since late September. A similar adjustment, but in the opposite direction, occurred in August 2005 when the discounts changed from approximately 85 cents per bushel to 35 cents per bushel. It then varied within a 20-cents-per-bushel range.
An analysis of the price premiums offered for 15 percent protein shows nearly identical results. There is a rapid adjustment that occurs during harvest, then a period of fluctuation occurs within a narrow range, which is followed by another adjustment during harvest. In other words, the protein discounts and premiums have nearly identical patterns but in opposite directions. The graphs for both the 15 percent protein premiums and the 13 percent protein discounts can be found on my website (http://www.ndsu.edu/cropeconomics). These graphs will be updated periodically throughout the 2010 growing season.
The primary reason the current protein discounts and premiums are so strong is that the average protein levels for the 2009 spring wheat crop were below normal. The results from the 2009 U.S. Hard Red Spring Wheat Quality Report show that there was a significant reduction in the number of samples testing 15 percent protein or higher and a significant increase in the number of samples testing below 13 percent protein. This suggests that the current spring wheat protein discounts and premiums will not change significantly until the protein content of the 2010 spring wheat crop is known.
So what does this mean for marketing the remainder of the 2009 crop and planning for the 2010 spring wheat crop? If the protein levels for the 2010 spring wheat crop are near normal, both the protein discounts and premiums likely will soften. For those lucky farmers that did produce high protein wheat, this means that the protein premiums will get smaller and you should try to market the rest of your 2009 crop before next harvest. For those farmers with low protein wheat between 12.5 and 13.5 percent, the less aggressive discounts after harvest may pay for the extra storage costs. However, this assumes that you have enough on- farm storage for both the low protein 2009 spring wheat and the 2010 production you plan to store. This also assumes that you have the financial capacity to meet the farm's cash flow needs until the 2009 spring wheat can be sold.
Olson is a crops marketing economist with the NDSU Extension Service.