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Nearby SRW Futures Position Reflects Potential High-Quality Supply Shortage

Aug 14, 2015

By Stephanie Bryant-Erdmann, US Wheat Associates, Market Analyst

Over the past fifteen years, KCBT hard red winter (HRW) wheat futures prices averaged $0.35 per bushel over CBOT soft red winter (SRW) futures. Recently, however, the gap between CBOT and KCBT narrowed and then flipped in the nearby September contracts due to bullish fundamental supply and demand factors affecting the SRW marketplace.

Traditional thinking may consider SRW as a “commodity” wheat category, instead of a functional ingredient. SRW works well as a lower cost, blending wheat, so countries with government wheat purchase programs and subsidized foodstuff production — notably Egypt, which bought 3 million metric tons (MMT) of SRW in marketing year 2007/08 — used to dominate U.S. SRW imports.  

Today, the growing global middle class is demanding more dietary variety. Euromonitor reports that pastry and cake consumption is growing at a rate of about 3 percent per year. Biscuit (cookie) and cracker production is also increasing as processors respond to changing demographics and the resulting retail and export sales opportunities for these product lines. To meet demand, they are turning to SRW, as well as soft white (SW), wheat from the United States.

Similar to SW, SRW has low protein content, a soft endosperm and weak gluten that is well suited to the production of these products. Mexico, home to Bimbo, the world’s largest baked goods company, and an increasing number of wheat food snack companies, has imported an average of 1.14 MMT of SRW over the past five years. Similarly, Colombia, with two of the largest cookie and cracker companies in Latin America, increased total SRW imports by 37 percent from marketing year 2013/14 to 2014/15.

This increased demand for the unique characteristics of SRW, along with potential supply issues foreseen by the global market in 2015/16, indicates why SRW futures prices recently topped HRW futures. For example, USDA pegged SRW planted area for 2015/16 down 7 percent from the five-year average and production to be 15 percent less than the 2014/15 crop. Additionally, excessive moisture, disease pressure and harvest delays adversely affected quality in much of the SRW growing areas, contributing to some supply scarcity in the top SRW milling grades. As of last Friday, the cumulative test weight average of 57.2 lb/bu (75.4 kg/hl) was almost 1 lb/bu lower than the 58.1 lb/bu (76.5 kg/hl) recorded in 2014, while protein at 9.9 percent (12 percent moisture) and 1000 kernel weight at 32 grams were the same as in 2014/15.

While the SRW wheat market certainly has a more bullish cash market scenario than HRW, the U.S. wheat store is always open and customers are encouraged to set up a meeting with their local USW representative who can help them review their quality specifications to ensure that their purchases meet their expectations and needs.

Source: USW