Will the market pay for protein?
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Will the market pay for protein?

Will the market pay for protein?

Heading into season 2017/18, the outlook for global wheat prices is for some upward movement over the coming 12 months: Rabobank places Chicago Board Of Trade (CBOT) wheat at USc 475 by the end of 2017 and USc 490 by Q2 2018. Of course just as ‘oils ain’t oils’, wheat is not wheat. 

CBOT wheat provides a good benchmark for the general market direction but fails to convey market appetite for high-protein wheat. Instead, we can use the movement of Kansas City wheat and Minneapolis wheat contracts relative to the CBOT for this, and to speculate on the whether the market will pay for protein in the coming Australian season.

The CBOT wheat contract is based on US soft red winter (SRW), roughly substitutable with Australia’s ASW, while the Kansas contract (KCBT) is based on US hard red winter (HRW) and is a mid-protein wheat roughly equivalent with Australia’s APW1. The Minneapolis contract (MGX) is for US hard red spring (HRS) wheat, and is equivalent to Australia’s APH. So respectively, the CBOT, the KCBT and the MGX wheat contract prices indicate the direction of low, mid and high protein wheat.

This past fortnight the trading spread between these contracts has opened up. In particular, KCBT wheat is now trading USc 12.75/bu over the CBOT, up from just USc 0.25/bu two weeks ago. Meanwhile during the same period, MGX wheat has passed USc 600/bu for the first time since August 2015 and, at USc 617/bu, is now USc 160/bu above KCBT wheat.  

These spreads have opened up as lower protein harvest results have come in across Texas and Oklahoma, following on-going cold conditions during that wheat’s maturation, and as dryer conditions take hold across the US northern plains areas and into Canada where spring wheats are grown. Lower volumes expected from Europe, coupled with higher potential Black Sea production, supports the outlook for a relatively higher proportion of low protein wheat being available in the coming six to nine months.

So the market will be paying for protein, but will it pay enough to warrant growers chasing protein?  

While grower decisions to pursue protein are primarily made before the season through variety selection, fertiliser application and where the wheat is grown, for others, if rainfall allows, in-season nitrogen application will be key. All else being equal, at current spreads the market is paying about $AU3.80/tonne per protein percentage point. 

Chasing protein at that value may not yet be worth it. However, with global urea and DAP prices fairly stagnant at near three-year lows, doing the calculations may be well worth it if MGX wheat contracts exceedUSc 700/bu as currently expected.