Bullish news finally arrived for the wheat market with the release of the Winter Wheat Seedings report in the United States on Tuesday.
Issued by the United States Department of Agriculture (USDA), the report is the first official estimate of winter wheat acreage for the 2016 harvest, and these figures have fairly strong implications for spring crops, particularly corn and soybeans.
USDA expects that winter wheat will have been planted on 36.6 million acres, far below the 39.3 acres the trade was expecting and almost identical to the acreage in 2010, which was an extremely low year -- one would have to travel back to 1913 to find a smaller winter wheat area.
Planting of Hard Red Winter (HRW) wheat, which makes up the majority of U.S. wheat, is estimated down 9 percent from last year while the forecast for Soft Red Winter (SRW) wheat is down 5 percent.
The HRW number is significant because area trends in the top HRW states give highly conclusive evidence of what crops may replace the wheat.
The loss in wheat area could ultimately lift the U.S. corn and soybean crops, but the wheat slump as given by Tuesday's report may not be headed for a turnaround.
Although wheat area has lost ground over the years to more profitable crops like corn and soybeans, the United States remains one of the world's primary wheat exporters.
Wheat to Stay Bullish?
Although spring wheat accounts for just over one-quarter of the total wheat produced in the United States, it has almost no influence on total yearly wheat area.
The past 40 years of data suggests that winter wheat planted area is highly indicative of what the total wheat area is likely to be (tmsnrt.rs/1mZeeBv).
Given USDA's initial projection for winter wheat, and assuming that history is an indication, the market should prepare for overall 2016 wheat area to be down quite significantly in the United States.
The Prospective Plantings report, which will provide an updated view of winter wheat acreage and is expected from USDA on Mar. 31, might give winter wheat area a bump as a decline from Winter Wheat Seedings has only occurred once in the past 10 years (2012).
But when it comes to the September Small Grains Summary, the bias would be for 2016 winter wheat area to decrease from January's report.
Comparing initial estimates versus final figures over the past 10 years, lower initial estimates tend to become lower, while higher initial estimates tend to become higher.
It is important to note that while wheat area is relatively final in the September report, subsequent adjustments are possible but are typically very minor if they occur.
Dissecting the Impact on Spring Crops
Several competitor crops are unlikely to experience an increase in planted area as a result of the decline in winter wheat seeding, based on national-level trends.
These crops include but are not limited to barley, alfalfa and hay, sorghum, and sunflower seed. And although cotton is another potential alternate to winter wheat, history does not suggest a significant relationship between winter wheat and cotton area.
The biggest winners are likely to be corn and soybeans, both of which could get an extra boost in planted area in the spring. Canola, which is primarily grown in the northern plains, may also be favored where wheat acres were lost.
But the impacts are highly dependent on the state, and the knowledge that HRW took the biggest hit to area reveals some of the best clues as to how acreage will shake out in the spring.
Kansas, Nebraska, and Oklahoma accounted for 57 percent of HRW production in 2015, and winter wheat area in these three states has the strongest inverse relationship with corn and soybean area over the last 40 years than any of the other states by a large margin.
This means that during the years when acres planted to winter wheat area were relatively low, subsequent corn and soybean planted area almost always tracked higher.
In Nebraska, where record low HRW area was reported, historical planted winter wheat acres have the strongest link with planted corn and soybean acres than anywhere else in the country, with a very large preference to soybeans.
Although Nebraska only accounts for 6 percent of U.S. HRW, it produces 12 and 7 percent of U.S. corn and soybeans, respectively, placing it at the third- and fourth-largest state in terms of production.
If increased corn and soybean acreage is realized in Nebraska come spring, U.S. production could be increasingly impacted since the state has the potential for the highest yields in the country.
Kansas is not as dominant on the corn and soybean front, accounting for only 4 percent of each crop nationally, but they lead U.S. HRW production with its 39 percent share.
Like Nebraska, Kansas wheat area is also highly indicative to trends in corn and soybean acres. The drop in winter wheat acreage in Kansas has freed up 700,000 acres that are very likely to be dedicated to corn and soybeans, with the slight advantage given to soybeans.
Oklahoma saw a drop of 400,000 winter wheat acres on the year, and the bias is overwhelmingly toward corn. Oklahoma has not planted more than 400,000 acres of corn since 1999, meaning that corn area in the Southern Plains state could reach a 63-year high this year.
Based on the firm links between winter and spring acreage across these three states, the extra 1.3 million acres reportedly not planted to winter wheat are likely to be split rather evenly between corn and soybeans in the spring, all other factors equal.
In the SRW states that are also big corn and soybean producers, historical data trends over the past 40 years suggest that in the spring, lost winter wheat acreage is more likely to be allocated to corn in the southern SRW belt (Arkansas, Missouri, southern Illinois) and to soybeans in the northern SRW belt (Indiana, Ohio).
With this in mind, corn acreage is likely to see a bigger spike out of the SRW states as a result of lost winter wheat area since the wheat plantings fell far short of last year in the southern SRW states, while northern SRW states increased winter wheat area on the year.
There are several factors at play aside from past trends when it comes to planting decisions, such as cash and futures prices along with implied profitability, both of which have recently favored soybeans.
But regardless of the economics, the weather has the ability to play the trump card at any time, reminding us that we should always be prepared for a curve ball to be thrown into even the best of models.