Cash Market Moves

13 Feb 2017

By Mary Kennedy
DTN Canada Grains Analyst

Durum is a type of wheat that is very dense and high in protein. Approximately 80% of the nation's nearly 100 million bushels of durum wheat is grown in North Dakota. One 60-pound bushel makes about 42 pounds of pasta or roughly 210 servings of spaghetti. It is often considered one of the most nutritionally significant forms of wheat.

It is also one of the hardest of the wheat family to protect from Fusarium head blight (FHB), a kiss of death for growers. Also called head scab, it can produce the mycotoxin DON, also known as vomitoxin. This disease causes significant yield loss and reduces quality.

The 2016 durum crop was hit by FHB and many North Dakota and Montana durum growers have been having second thoughts about growing durum again. U.S. Wheat Associates reported this past fall that FHB was reported across northern North Dakota and in northeast Montana durum area, and the final average DON value for durum was expected to be higher than normal in 2016. Humans are not normally affected by vomitoxin, unless infected grain is ingested in very high quantities. FDA has limits on intake in finished product (i.e., less than 1 ppm), but even at low levels millers are reluctant when it comes to buying infected wheat. Grain infected with vomitoxin can also affect flavors in food and processing performance and limit the sale of feed by products produced by the milling process.

Durum likes dry hot days and cool nights which is why much of the U.S. crop is grown in northwestern North Dakota and northeastern Montana, also known as the durum triangle. However, in 2016, much of the key growing areas experienced humid weather during the critical stage of flowering and grain filling stages of the durum plant. Growers were diligent in applying fungicide to fight the scab, but to no avail. The disturbing part is that the disease hit areas that hadn't seen much, if any, in the past.

Jochum Wiersma, a small grains specialist and professor at the University of Minnesota Crookston, told DTN that he spent 20 years in the trenches fighting FHB and said that while some progress has been made, the disease is far from "tamed." The disease first flared up in the 1990s in northeast North Dakota and northwest Minnesota during a continued, ongoing wet spell. Wiersma told me that he initially wanted to work on this disease in graduate school but was dissuaded to do so as one member of his exam committee asked if he "had any plans to complete his degree."

Nevertheless, in his role as extension agronomist, Wiersma has worked with growers since 1995 to combat this disease. During the past 20 years, progress has been made in developing crop varieties that are relatively resistant to scab, plus farmers have better access to, and better understanding of, fungicides that hold down the disease. Also, rotation is key. "With the popularity of corn in North Dakota, it is imperative to remember that corn is an alternative host to Fusarium graminearum, the fungus that causes FHB in durum, but causes stalk rot in corn. Corn stover will be a food source for this fungus for two years after the corn has been harvested," added Wiersma.

"Long-term weather patterns appear to be switching to a wetter cycle which will be more favorable for FHB and the next wet cycle will tell us if we've made adequate progress to limit the economic damages caused by this opportunistic disease," said Wiersma.

CANADA DURUM WORSE OFF THAN U.S.

On Oct. 20, 2016, the Saskatchewan weekly crop progress report said that harvest was stalled for the third straight week, with 24% of the durum crop still in the rain-soaked fields. Each week the crop stayed in the field, the more the quality was compromised. In the final grade report from Canadian Grains Commission, they reported that overall, 64.6% of the samples were degraded due to fusarium damage. The HVAC count was degraded in 11.2 % of the samples, 9.3% with mildew and 2.2 % with severe sprout. The majority of the samples graded No. 3 Canada Western Amber Durum (CWAD).

"There were lots of issues with contracts up here last fall that were being handled differently from company to company," said Cliff Jamieson, DTN Canadian Grains Analyst. "I heard about a farmer that had 4CWAD contracts in place with two companies roughly in the $6/bushel area. Grain was grading Canada feed, so one company was reported to be deducting around $3/bu., the other over $5/bu. Doesn't leave much left for the grower, especially when you spend three to four months trying to get it off the field."

An expected increase in both United States and global durum stocks, combined with Canada's record 2016 durum production of below-average quality, continues to pose a challenge for the prairie durum market. On Feb. 3, Statistics Canada reported 6.9 million metric tons of durum stocks as of Dec. 31, up 63.1% from the previous year and a record for this date. The most recent export data shows cumulative exports through licensed facilities as of week 27, or Feb. 5, at 2.172 mmt. This is roughly 13% below the same period in 2015/16, and the lowest volume shipped at this point in time in the past five years. Current government estimates point to 2016/17 exports falling just 1% from the previous year by the end of the crop year.

"Ending stocks are expected to balloon by 136% to 2.6 mmt this crop year according to government forecasts, although the five-year average disappearance in the January-through-July period is 3 mmt, which points to the potential for ending stocks to reach a much higher level by year's end," added Jamieson. "Success in pushing the lower grades into feed channels will be the key to capping the growth in stocks. Top grade prices on the Prairies are ranging from $7 to $8/bu., while there seems little hope for upside potential at present."

Jamieson expressed concern that the large carryover and growing risk of fusarium damage on the Prairies is pointing towards a move away from durum in 2017. "Early indications from Agriculture and Agri-Food Canada suggest producers will reduce seeded acres by 15% in the upcoming year to approximately 5.3 million acres, while private estimates suggest that the reduction will even be larger. Both canola and spring wheat are expected to benefit from this move away from durum."

FINANCIAL BOTTOM LINE?

What's the bottom line financially?

While durum commands a higher price than spring wheat, the risks can many times outweigh the value of any premiums. Currently No. 1 Hard Amber Durum (HAD) is at about a $1.50 to $2.00 premium to No. 1 MQ 14 pro spring wheat depending on the milling grade/value. That's not much of a premium when you factor in the complexity of growing a "perfect" crop that will appeal to buyers.

Durum commands a premium when it is at least 75% HVAC (hard and vitreous kernels of amber color), 13% protein, 60 pounds, 300 falling number, plump kernels and as the old timers I used to trade with said, "It has to have a shine." Top milling durum that grades 85% HVAC or better, is 13.5% protein and 325 FN can receive an even bigger premium. It also needs to be free of sprout, ergot, frost, and anything else that affects the No. 1 milling grade sought after by semolina (durum flour) buyers and pasta plants.

If a farmer has a top milling durum contract and drops below the required grade, he can face major discounts as high as $5 or more per bushel, or even rejection depending on how low the quality drops. Some farmers will run scabby/vomitoxin-infected durum through a cleaner, but while the added expense of doing that can cut in to margins, it is still a "cheaper" hit cost wise if they try to market it uncleaned.

Jamieson said that last fall, "Farmers in Canada not meeting required grades on their contracted durum were facing the prospect of writing a check for tens of thousands, in some cases hundreds of thousands of dollars to buy out their contract, unless they could roll it." He said he had heard a buyout on a farmer's contract could be as high as $250,000. The farmer, like many others in the area, was not able to harvest all of his durum and the poor quality didn't meet his contract requirements.

The North Dakota Wheat Commission (NDWC) reported that the 2016 U.S durum crop in Montana and North Dakota was the largest since 2000 and nearly 50% larger than 2015, due to record yields and a one-third increase in planted area. "The crop averages No. 1 Hard Amber Durum with grade parameters that are very similar to 2015. The crop benefited from mostly dry conditions for the bulk of the harvest, although significant differences in moisture and disease pressure during the last half of the growing season resulted in a big difference in DON levels in some of the northern growing regions," said the NDWC. (See https://goo.gl/…)

"Had the U.S. crop also been poor and had the market run higher, the financial loss to the growers in Canada would have been even worse," concluded Jamieson.

For more on the subject of vomitioxin, see my blog last fall on "What Happens When Grain Gets Sick?" at https://goo.gl/….

Mary Kennedy can be reached at mary.kennedy@dtn.com

(ES)