It is puzzling that the Canadian Wheat Board dropped the 2006-07 Pool Return Outlook for wheat.
The board says the wheat market rally that began in mid May has had little effect on the 2006-07 pool because farmers did not deliver as much grain as expected, preferring to delay delivery into the higher priced new crop pool. That means less old crop grain was sold at high prices that would have lifted the pool.
That might be an explanation for why the price didn’t increase, but as an explanation for a decrease, that’s disappointing.
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The latest PRO for old crop Canadian western red spring 13.5 percent was lowered to $214 per tonne at port. That is down $5 from the May and March PROs and $2 lower than the December PRO.
That $5 per tonne drop is worth about $89 million in lost revenue to prairie wheat farmers when applied to the 17.75 million tonnes or so delivered in the crop year.
Let’s review the events of the last six months.
As they prepared the March PRO, CWB analysts were probably thinking about the U.S. winter wheat crop being 3.5 million acres larger than last year. The drought that had hurt U.S. production in 2006 was over and the winter wheat crop had plenty of moisture as it came out of dormancy.
Europe’s winter wheat crop had enjoyed a mild winter and was ahead of normal maturity.
The possibility for stronger wheat prices in the next crop year probably seemed slight.
Under that scenario, farmers would deliver heavily as the end of the crop year approached to clear space for the new crop.
But then frost hit the U.S. winter wheat belt at Easter. In May and June the rain rarely stopped.
Yield and quality were damaged and prices started to climb. Worries about European crop quality and news of a smaller Canadian wheat crop added fuel.
The Minneapolis spring wheat contract rose to about $6.50 US per bushel from $5 in mid May.
That lifted the new crop PRO, making it a wiser bet to wait and deliver wheat into the new pool.
Some confirmation of this can be seen in the gap between actual and projected export numbers. Agriculture Canada forecast wheat exports would total 15 million tonnes but it appears the number will be closer to 14 million tonnes. On the other hand, you can’t say farmers stopped delivering. Indeed slightly more than half of the total was delivered in the second half of the crop year.
Another factor at work during the period was the fast rising Canadian dollar.
In March, the dollar was worth about 86.5 cents US.
By mid May it had climbed to 91 and by last week had added another five cents before edging back in the last few days.
But the stronger dollar only lessened the effect of the wheat price increase. It did not eliminate it.
Clearly, with many factors influencing prices, it is not easy to make Pool Return Outlooks.
But given the outlooks in March and May, and a rising market since then, it is understandable that a $5 per tonne drop in the last PRO is hard for farmers to take.
