The Tale of Two Winter Wheat Futures
???? Fundamentals
Experienced grain traders know that when there is talk about the growing conditions of the winter Wheat crop, the first question that should be asked is “which one”? In the U.S., there are two major varieties of winter Wheat, soft red winter (SRW) and hard red winter (HRW).
SRW Wheat is a lower protein Wheat that is normally milled into flour to be used in the production of cakes, cookies, and pastries. Production for SRW Wheat is usually centered in the Ohio River Valley states of Missouri, Illinois, Indiana, Kentucky, and Ohio. This is the class of Wheat commonly referred to as Chicago Wheat for the futures contract originated at the Chicago Board of Trade.
HRW Wheat is a higher protein variety that is normally milled into flour to be used in bread making. Production for HRW Wheat is centered in the Plains states of Kansas, Oklahoma and Texas. Traders normally refer to this variety as Kansas City or K.C. Wheat, because the futures contract is traded at the Kansas City Board of Trade.
The continuation of the severe drought seen in the west central portions of the U.S. has the potential to stress the development of the HRW Wheat crop that is currently in its winter dormancy phase. At the end of January, 39% of the HRW Wheat crop was rated poor to very poor in the state of Kansas, which is the leading producer of HRW Wheat. Extreme or exceptional drought conditions are found throughout the Great Plains, with longer-term forecasts calling for little relief in the coming weeks.
The SRW Wheat crop is in much better shape, as adequate moisture levels are expected in the Ohio River Valley. Though there is still plenty of time for weather conditions to change, the current outlook seems to favor strong SRW production totals this summer, while the state of the HRW crop is still in flux.
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