Chicago/Sydney. Hot, dry weather has seen high-protein wheat emerge as the one tight spot in a global grains market swamped with abundant stocks, after four years of bumper harvests.
Droughts are shriveling high-quality wheat crops in key breadbaskets, sending prices to multi-year highs as bread makers scramble for supplies.
Low prices against a backdrop of plentiful supply had discouraged US farmers from planting wheat, and dry weather is now exacerbating the shortage from North America to Australia.
Canada's Alberta province, another top wheat producer, is also suffering from unusually dry weather.
"The million-dollar question that the trade is still trying to figure out is, of all the global supplies out there, how much is going to be high-protein wheat?" said Terry Reilly, senior commodity analyst with Futures International in Chicago.
Wanted: High-Protein Wheat
The world is awash with lower grades, with the US Department of Agriculture (USDA) projecting world wheat stocks at the end of the 2017/18 marketing year at a record high of 260.6 million tons.
But flour millers and bakers need milling wheat, often with a protein level of 12 percent or higher, to make consistent bread.
US spring wheat, typically with a protein content of 14 percent or higher, is also used for blending with lower grades of wheat. Spring wheat usually commands a premium over the lower-quality grades.
The United States is one of the world's biggest wheat exporters. Latest estimates from the USDA put US production of spring wheat other than durum, which is used for pasta, at 423 million bushels, the smallest since 2002.
Wheat futures on the Chicago Board of Trade hit two-year highs this month above $5.50 a bushel, while values on the Minneapolis Grain Exchange - a niche market for high-protein spring wheat - spiked above $8 a bushel for the first time in four years.
Market direction will depend now in part on how spring wheat crops in the United States and Canada, which typically have high protein levels, finish the growing season, and whether Australia's drought persists.
Next week, the market will find out how bad the damage is to wheat fields in North Dakota, by far the biggest US spring wheat producer, when industry experts and farmers conduct an annual crop tour.
Drought and searing heat have scorched crops in the western portion of the state, but crops along the eastern border and in neighboring Minnesota so far have escaped major damage.
The impact of weather problems is magnified because wheat plantings in the United States for 2017 were the smallest in records dating to 1919, reflecting low prices that prompted farmers to plant other crops including soybeans and corn.
The European Union and Russia, which vie with the United States to be the world's top exporter, have the potential to supply some customers that normally rely on North American high-protein grain.
European traders are hopeful German high-protein wheat will take over export sales to traditional customers of US spring wheat, especially Nigeria and other African countries.
There are some concerns, however, that late-season rains in Germany may reduce protein levels.
"The late rain could cause higher yields in tonnage terms but these larger-yield crops often have lower protein," one trader said.
"It is too early to say if the rain will reduce protein or if Germany’s harvest will contain sufficient volumes of high-protein wheat."
Russia's wheat crop has been delayed this year by rainy and cold weather but the country's harvest is still expected to be large, only slightly lower than a record crop a year ago.
"The quality in general will be higher than a year ago," Arkady Zlochevsky, the head of Russia's Grain Union, a non-government farmers' lobby, told reporters in Moscow on Tuesday.
Traders and analysts are, however, cutting expectations for Australia's wheat production due to a lack of soil moisture.
"Some areas in Western Australia [one of the larger wheat and rapeseed producing states] are experiencing all-time record low record soil moisture levels. With conditions as they are ... drought stress will almost certainly be an issue for crops moving forward," said Thomson Reuters weather analyst Ed Whalen.
"The market is beginning to factor in a crop of between 19 million to 21 million tons," said Matthew Pattison, trading manager at Nidera, the grains trader acquired this year by China's COFCO Group.
Australia's chief commodity forecaster in June pegged wheat output at 24.1 million tons.
Should Australian exporters have less wheat to ship, Indonesian and South Korean millers will be forced to turn to supplies from the Black Sea, where production has been aggressively expanded in the last decade.
Australia has steadily lost market share in recent years, especially to Russia, and analysts believe there could be a permanent shift away from the world's No. 4 exporter.
A shortfall in the US spring wheat crop could bolster imports of Canadian spring wheat, said Jay O'Neil, an agricultural economist with Kansas State University.
Not everyone faces shortages of high-quality wheat, however.
China has increased output of better-quality wheat significantly this year, and that could cut its demand for imports from major suppliers such as the United States and Australia.