USA Wheat: area compensates for low yields in Kansas

Kansas, Oklahoma and Texas are three large states when it comes to Winter Wheat production in the USA, accounting for around 40% of national production. These states have fertile soils, a favorable climate and advanced agricultural technology, which allows them to produce high-quality wheat. The main type of wheat produced in these states is Hard Red Winter, or HRW.

The recent drought observed in these states has had a significant impact on growing conditions, which are well below the 5-year average. These poor conditions will likely lead to low productivity in these states, and as we are about a month away from harvest, a recovery in conditions is very unlikely.

Weather forecasts also do not point to better conditions during the remainder of the harvest. Even though some regions in the three states may receive above-average precipitation, drought is expected to persist across a large portion of their area through July. One of the relevant effects of the drought in Kansas is the high spreads between Kansas and Chicago wheat.

The spread between the two types of wheat is a measure of the differences in quality between them. Kansas wheat is typically of higher quality than Chicago wheat, which is why it often trades at a premium. However, the dispersion between the two is also influenced by supply and demand factors. When there is a wheat shortage in Kansas, the spread tends to widen.

Drought in Kansas, Oklahoma and Texas will likely reduce HRW production, which will likely keep the differential between Kansas and Chicago wheat prices at historically high levels.

However, despite the high spread between Kansas and Chicago, looking at the total winter wheat crop in the United States, it is expected to bring downward pressure on prices due to the large acreage of winter wheat planted this season.

If the harvested/planted area ratio remains in line with the 5-year average, even with lower yields for this crop, it could be the highest US winter wheat production since the 19/20 cycle. However, low yields can reduce these expectations and, in extreme cases, lead to abandonment of the area. Therefore, it is very important to closely monitor the progress of the harvest once it begins.