By Chad Weigand, U.S. Wheat Associates market analyst

In its quarterly crop report released recently, the Australian Bureau of Agricultural Resource Economics and Sciences (ABARES) projected this year's Australian wheat crop at a record 26.8 MMT (984 million bushels). Although Australia has the potential for a bumper crop, the wettest spring on record in eastern Australia has caused serious concerns over quality and is helping push its wheat prices much higher.

ABARES noted that protein levels will be down and "the chance of achieving prime milling grades of wheat has been reduced for crops yet to be harvested." Commonwealth Bank of Australia stated last week that as much as 35 percent of the eastern Australian wheat crop might be downgraded to feed wheat, making this Australia's largest feed wheat production year in history. Commonwealth Bank noted that quality milling wheat prices have spiked as a result, with Australian Prime Hard (APH), Australia's highest protein class, prices surging by more than $100 per MT in the past two months.

Quality milling wheat supplies have been tight all year following production setbacks in both Canada and Germany. Extremely wet conditions in June led to a 14 percent reduction in 2010/11 Canadian output, while dry conditions significantly reduced Germany's production. In the U.S., hard red spring (HRS) supplies are at an 18-year high (22.8 MMT or 837 million bushels), but two consecutive years of below average protein levels, combined with this year's global production setbacks, has pushed HRS 14 percent FOB basis to $4 per bushel ($147 per MT) out of the Pacific Northwest, compared to $1.60 per bushel ($59 per MT) a year ago.

Futures prices have also climbed significantly in recent weeks due to ongoing quality concerns. The March 2011 contract at the Minneapolis Grain Exchange, the U.S. exchange for higher protein spring wheat, has gained 12 percent since the last week of November, rising from $7.47 per bushel ($274 per MT) on November 23 to $8.34 per bushel ($306 per MT) on Dec. 16. The spread between lower protein soft red winter and HRS increased by 68 percent just last week alone, climbing from 56 cents to 94 cents (see chart).

Spread between CBOT and MGEX March 2011 contract