Protein Premiums and DiscountsProtein Premiums and DiscountsProtein Premiums and DiscountsProtein Premiums and Discounts
byVance Taylor
ND Mill and Elevator To the
North Dakota Legislative Interim Agriculture Committee
Representative Phillip Mueller, Chairman1/12/2010
1
Premiums and Discounts for ProteinIssues
• Ag Producers: – Large discounts severely impact wheat producer’s returns per acre (but these are offset in part byLarge discounts severely impact wheat producer s returns per acre (but, these are offset in part by
concurrent increased yields)– Premiums /discounts e are typically highly variable, unexpected, non-transparent in some cases and
not hedgeable. As a result, discounts are risky, and reduce returns– Premiums however, can have a substantial impact on improved returns
• Ag ProcessorsAg Processors– Most sales involve simultaneous purchases of cash grains, and as a result, premiums and discounts
have lesser impacts on processors– Risks associated with making sales of higher protein flour, and not having the ability to acquire
higher protein wheat• Discounts and premiums:Discounts and premiums:
– While much attention is on discounts, it should be emphasized that there are concurrent premiums for higher quality wheat which should be viewed favorably
• Other grains and quality factors (non-protein factors in wheat; vomitoxin and malting barley; corn and toxins which impact feeding and DDGs)
– Issues of wheat protein are not dissimilar from other factors and from what is occurring in otherIssues of wheat protein are not dissimilar from other factors, and from what is occurring in other grains
– Markets have become extremely responsive to quality, including: • growers responsiveness to market signals, albeit in some cases lagged• Quality requirements of end-users which have escalated
2
TopicsTopics
• Supply conditions for proteinSupply conditions for protein– 2009 is a year in which the major sources of hard
wheat protein each had near record low levels
• Definitions: Basis and Protein Premiums– Clarify difference between these terms
• Premiums and Discounts for Wheat Protein– Comparison across yearsp y– Seasonal
• Outlook
3
Supply of Protein for Hard Wheats in N. America
16
17
•3 sources of supply for protein in Hard Wheats in N.
( d
15
B)
America (HRW, HRS and CWRS)
•Typically, flour produced from HRS requires wheat in the 14% level and as such
13
14Pr
otei
n (1
2% M
Bthe 14% level, and as such commands premium relative to all others
•2009 protein conditions
•Lower levels in
11
12HRW, and Canada; and record low levels in HRS in ND
•Lower HRS protein
10
11
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
impacted by •Growing conditions
•Lesser fertilizer
•Adoption of lower protein varieties in some regions
Kansas North Dakota Can. CWRS1 Can. All Mill Gradessome regions
4
Quantity of HRS ByQuantity of HRS By Protein Category
180,000
•Production and yields were unexpectedly large in 2009
140,000
160,000•The combination of larger supplies, and lower average protein levels altered the distribution of supplies of different protein levels
80 000
100,000
120,000
ushe
ls (0
00)
-11.9
12-12.913-13.914-14 9
•Compared to recent years•A large increase in 13% protein and below•Supplies of 14% were normal
40,000
60,000
80,000B
u 14.915-15.916+
•Supplies of wheat with greater than 14% protein were severely reduced
•Impact: Market responded by
0
20,000
2006 2007 2008 2009
widening premiums and discounts •Premiums for 14’s and above went to very high levels; and•Discounts for lesser protein went larger than normal
5
Market What is reported
MGEX Futures Prices for futures as defined
Price Reporting above
Below have public price reporting mechanisms through the USDA AMS
•Various mechanisms exist for price reporting. These include highly transparent price reporting
MGEX Cash Market Prices for cash transactions; including premiums and discounts for protein, and other factors
highly transparent price reporting for futures.
•Public price reporting exists at some terminal markets. These have lesser transparency than futures other factors
Other Terminal Markets ( l d )
Selected cash prices, but, not specific with
i d
lesser transparency than futures, but greater transparency than more local cash markets. Traditionally, prices are reported daily for 13-15% protein; but, recently began reporting values for 12% protein
(Portland, KC, etc) respect to premiums and discounts
Below do not have public price reporting
reporting values for % protein
•Prices quoted at local elevators are largely reflective of these market conditions.
•Also reflect local market Below do not have public price reporting mechanisms
Local elevators and individual mills
Prices for cash transactions, including
•Also reflect local market conditions •Are the basis of transactions with growers
individual mills transactions, including premiums and discounts for deviations from milling quality specifications 6
MGE Futures Delivery and Cash Wheat Specification
Factor Future Delivery Milling Quality
Market Specifications Specification Wheat (Cash) Market Specifications
G d N 2 NS ( b) N 1 DNS
•Premiums and discounts emerge as price differentials in the cash and f k Grade No. 2 NS (ob) No 1 DNS
Protein 13.5% or 13% at 3c/b discount
13-15%
futures market
•Futures has a lower specification than that required in the cash market which is commonly referred as Milling Test Weight 58 or 60 ob
@+2c/b58 lbs
Moisture <13.5% <13.5%
is commonly referred as Milling Quality
•Differences between cash and futures market values is referred to as the
Falling Numbers
Not specified >300
Vomitoxin Subject to FDA <2 ppm
market values is referred to as the basis and used for price quoting in buying/selling grain
•Price differences arise attributed to Damage Grade limit <1.5%
Dockage <1.5% <1.5%
the differences in these specifications
7
Basis and Protein PremiumsBasis and Protein Premiums
• Charts to follow. Major points are
– Basis for HRS 14 and above increased sharply following harvest; more recently premiums have been declining. Ultimately this follows typical seasonal patterns counts for 13s increased sharply following harvest
• Typically, 13s have a basis of about 0c/b (due in part to the delivery mechanisms at yp y, ( p yMGEX futures)
– Discounts for 13s vs. 14s are greater than normal, and highly volatile in 2009
• Normally, this spread is about -25c/b
F ll i h t thi di t i d t 180 /b d th i d b k t• Following harvest, this discount increased to -180c/b, and then increased back to the -100c/b range
• More recently, it has ranged from -200 to -80c/b
8
Mpls. Protein Basis 2006Mpls. Protein Basis 2006--20102010pp
600
400
500
60013% Protein 14% Protein 15% Protein
200
300
400
Cen
ts/b
u
0
100
0
C
2006
2007
2008
2009
2010
-100
9
13% Wheat Basis Mpls13% Wheat Basis MplsRelative to Nearby Mpls FuturesRelative to Nearby Mpls Futures
250
200 1991
1992
1993
2001
2002
2003
100
150
Per
Bus
hel 1993
1994
1995
1996
2003
2004
2005
2006
0
50Cen
ts
1997
1998
1999
2000
2007
2008
2009
J F M A M J J A S O N D
-50
0
10
14% Wheat Basis Mpls14% Wheat Basis MplsRelative to Nearby Mpls FuturesRelative to Nearby Mpls Futures
350
250
300
el
1991
1992
1993
2001
2002
2003
150
200
ts P
er B
ushe 1994
1995
1996
1997
2004
2005
2006
2007
50
100Cen
t 1997
1998
1999
2000
2007
2008
2009
J F M A MJ J
A S O ND
0
1111
15% Wheat Basis Mpls15% Wheat Basis MplsR l ti t N b M l F tR l ti t N b M l F tRelative to Nearby Mpls FuturesRelative to Nearby Mpls Futures
500
4001991
1992
2001
2002
300
Per B
ushe
l 1993
1994
1995
1996
2003
2004
2005
2006
100
200
Cen
ts P
1997
1998
1999
2007
2008
2009
J F M A M J J A S O N D
0
100 2000
12
J F M A M J J A S O N D
Wheat Protein Spread (14Wheat Protein Spread (14--13)13)Wheat Protein Spread (14Wheat Protein Spread (14 13)13)
50
0 1991
1992
2001
2002
-100
-50
Per B
ushe
l 1993
1994
1995
1996
2003
2004
2005
2006
-150Cen
ts P
1997
1998
1999
2007
2008
2009
J F M A M J J A S O N D
-250
-2002000
13
J F M A M J J A S O N D13
14% Basis Behavior for Mpls 14% Basis Behavior for Mpls Average of 1998Average of 1998--2007 2007 compared to 2008 and 2009compared to 2008 and 2009compared to 2008 and 2009compared to 2008 and 2009
•The average basis has a fairly predictable behavior as shown 200
•2008 and again in 2009, the basis increased to near-record highs during November (illustrated here and above)
h h h d d
150
bu•Since then, they have moderated down, but, remain high by historical standards
•Outlook: typically there is a50
100
Cen
ts/b
•Outlook: typically, there is a moderate increase in basis through March, and then basis declines as the HRW harvest approaches Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
0
-1 Std. Dev. +1 Std. Dev. 2009/10Mean 2008/09
14
Seasonal projections of basis Seasonal projections of basis valuesvalues
•Basis and premiums are highly seasonal. Typically, increasing
350
from a harvest low, to a seasonal peak in November, and then declining
253
291272
245271
238212
281268
301
257
200
250
300
Cen
ts/b
u)
•The rate of increase in November depends on the supply of protein
140
98 101 101 92 101 92 8946
10490
145
101
50
100
150
Bas
is (C
•The rate of decline from March to July is in anticipation of new-crop HRW harvest, and depends on the outlook for that crop
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul0
Actual 14P14 03-08 Index
Actual 15P15 03-08 Index
15
SummarySummary• Wheat markets in 2009 have been severely impacted by the reduced supply of
protein in hard wheatsprotein in hard wheats. • Premiums and discounts for protein responded:
– Responses in the premium/discount market have been virtually all a response to the reduced supplies of protein
– Discounts became very large, and volatileDiscounts became very large, and volatile– Premiums escalated to near record high levels, but generally followed typical seasonal
patterns • Observations
– There appears to be an escalation in volatility in premiums and discounts– Mechanisms for reporting premiums/discounts may not be as robust as typically, in part due
to changes in the industry structure (fewer buyers; shuttle transactions etc)– Adopting of higher yielding varieties in traditional HRS growing regions, has the impact of
exacerbating discounts. This will likely continue as this wheat has to compete in the larger lower protein markets p
– For HRS, HRW and Durum wheat in the Dakotas, as well as for other grains (e.g., malting barley), quality supplies, requirements of end-users will continue to be of great significance to growers, merchandisers and processors.
16
