Downside Potential in Ontario Soft Red Winter Basis

After spending time at or near record highs following the 2015 harvest, Ontario Soft Red Winter wheat basis levels are likely in for some weakness.

With more Soft Red Winter (SRW) in the ground in the province this year and around the Great Lakes in general, an unusual supply imbalance that existed between Soft Red and the higher protein Hard Red Winter (HRW) and spring wheat following the 2015 harvest will likely be corrected with this year’s crop, said Dana Omland, Ontario grain merchandising manager, Ceres Global Ag Corp.

In most years, the lesser grown Hard Red Winter (HRW) enjoys a price a premium over the more commonly grown Soft Red Winter (SRW) – a dynamic at least partially rated to the typically smaller HRW supply. Ontario is after all, a net importer of high protein wheats. But that whole scenario was turned upside down in 2015-16, as the SRW market actually offered the more attractive returns.

Even now, southern Ontario elevators are offering new-crop SRW basis levels (30 to 35 cents over the July Chicago future) and producer prices (C$5.11 to $5.16/bu) that are generally on par with HRW.

Omland attributed the relative strength in the SRW market to a couple of factors, including last year’s small crop in Ontario. Due to overly wet fall weather, producers were only able to seed an estimated 630,000 acres of winter wheat for harvest last summer, way down from 775,000 acres a year earlier. And with acreage already down, the supply was further challenged by the fact a good portion of the Ontario crop– as well as that of Michigan, Ohio and Illinois – had quality problems.

With the quality problems added to the already small crop, basis levels had to rise to in order to draw in the best grain.

Meanwhile, the U.S. and Canadian high protein winter and spring wheat harvests turned out much better. At almost 827 million bu, U.S. Hard Red Winter production jumped 12% from a year earlier while Hard Red Spring output edged up 1.5% from 2014 at 564.1 million bu. All told, U.S. Hard Red Winter and Spring wheat ending stocks are projected at a 15-year high for 2015-16.

Although Canadian Hard Red Spring wheat production did decline about 5% in 2015, Omland pointed out that almost the entire crop was of excellent quality, with high protein levels. As such, basis levels did not need to rise – in stark contrast to the situation with SRW.

But just because the typical HRW/SRW price relationship stepped outside the norm in 2015-16 doesn’t mean it will stay that way. Omland said there have been no major, fundamental shifts in demand to affect the two kinds of wheat going forward, chalking up the bulk of the 2015-16 anomalies to a simple, one off supply imbalance.