Less Volatility Expected For ’05 Protein Premiums, Discounts

Scab could bring discounts for damage, vom

By Tracy Sayler

Wheat protein premiums and discounts may be less volatile this year, with premium highs and discount lows not as extreme as they were following the 2004 harvest.

That’s the expectation anyway. Market analysts and elevator merchandisers will be the first to tell you that protein premiums and discounts and other quality factors are a function of supply and demand, and can change depending on the bushels coming in, and what the mills are demanding.

Mike Krueger of The Money Farm says early spring wheat harvest reports in North Dakota and Minnesota indicated yields that were somewhat less than expected and protein better than expected, likely due to crop stress from heat and other factors.

Krueger points out that 13% pro basis levels were exceptionally strong as harvest began rolling in early August, a good sign that local markets have been more accepting of more average protein wheat levels, at least early on. “You could have a situation where there’s good demand for 12.5-13.5% hard red spring, because it might compare favorably with 12% pro winter wheat,” he says.

Rich Cole, grain merchandiser with CHS, Fergus Falls, Minn., says early proteins coming into their elevator have ranged from 12-13% on lighter ground to 13.8-14.8% on heavier ground.  “The thought is that N might have leached a bit with rain on the sandier ground.” As new crop wheat began to come in, the protein discount scale at CHS in Fergus Falls was about the same as it was last harvest, but Cole expects that if protein levels hold as harvest progresses, the discounts will likely alleviate.

“Right now (in early August) we’re at six cents a fifth from 14 to 13 (thus, a difference of 30 cents per point of protein between 14% and 13%) and eight a fifth below 13% (40 cents per point).  If protein in the Valley comes in better, than we’d expect those protein scales to improve, and definitely not be as wild as last year,” says Cole.

Kevin Knodel, manager of Prairie Co-op Elevator in Cleveland, N.D., agrees that protein discounts should improve as the wheat harvest progresses, and as the trade sorts out the quality of the new spring wheat crop.  “Early on we’ve had proteins from 12.7 to 15.4%,” he says.  “From what I’ve seen so far, I think our proteins are going to be a bit better than last year. It’s tough to say what’s going to happen, but we are coming off a low protein year.”

NDSU extension crops economist George Flaskerud says that the highest premiums are likely to occur from September to November, when premiums typically peak, and that discounts could decrease somewhat throughout the year if average or better quality is achieved in the U.S. and Canada.

During September to November of this year, a premium around 70 cents might be expected for 15% pro relative to 14% in the Minneapolis spot cash wheat market. Flaskerud’s projection is based on trends from 1997-2004 for protein premiums in Minneapolis and U.S. hard red spring wheat and Canadian wheat yields. The same trends indicate a projected discount around 40 cents for 13% pro relative to 14% pro.

Discounts for scab
The presence of scab this year could result in quality discounts at the elevator, and just as the severity and incidence of scab is variable in the region, so will the discount scales.

Cole says scab hasn’t been a problem with early-harvest wheat in the Fergus Falls area. “We saw some scab, but nothing greater than 1% (total damage), and nothing so far that would be enough to take us out of a milling quality wheat. If we start dumping some questionable quality grain, we’ll have to re-evaluate our situation.” He says mills buying wheat on the spot market generally like to see total damage under 2%, and vomitoxin (DON) under 2 parts per million.

Scab can result in price discounts relating to test weight, damage, and vom, for which many elevators have discount scales. Knodel has had early wheat come in with scab resulting in damage ranging from 1-2.5%. In areas where new crop coming in has escalating scab/vom problems, he says it would not be surprising to see local markets respond with escalating quality discounts.  “Later in the harvest year you could see vom discounts getting bigger than what they are now.”

Whether to sell lower quality wheat off the combine or store it can be a tough call; putting it under loan and evaluating how local prices and discounts next spring compare to the discount scales for grain under loan just might be the best option. The Farm Service Agency’s discount scales for grain under loan can be found online at www.fsa.usda.gov/dafp/psd/LoanRate.htm –- click on the link “Loan Premiums and Discounts.”

Producers who have grain stored under CCC Loan have three options at the end of the nine month loan period:

1. Repay the CCC loan principle plus interest;
2. Release the grain at the posted county price;
3. Forfeit and deliver the grain.

Protein Premiums
High protein premiums are usually short-lived, and tend to peak early—usually occurring during or after harvest (as do the most severe market discounts). Thereafter, the premiums (and discounts) ease as the marketplace adjusts to the crop that’s coming in.  That’s why NDSU extension crops economist George Flaskerud advises producers not to sit too long on high-protein wheat.  Usually it’s better to complete sales of 15% protein wheat during September-November, and 14% pro during November-January. Elevators that operate off of the “to-arrive” market may not see and thus offer premiums on protein as high as the Mpls cash market.  On the flip side, it’s usually better to store low protein/low quality wheat, perhaps putting it under loan, in hope of less severe discounts going into spring.

Wheat Protein Levels - 12% Moisture

Premiums & Discounts - Minneapolis Cash Markets