Wheat Protein Premiums: What Can You Expect in 2016?

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Montana wheat is special! The northern Great Plains wheat marketing landscape is unique to other U.S. wheat markets in that grain processors and elevators not only pay producers for how much wheat they market but also the quality of that wheat. The quality assessment is largely based on the protein levels—the proportion of protein content in a wheat kernel. Because wheat protein contents are important for milling flour that can produce different types of baked foods—higher protein wheat is needed to produce flour for foods such as breads, pizza crusts and bagels while lower protein wheat is needed for soft noodles, pastries, and cakes—there are numerous markets for wheat with different protein levels.

Montana producers primarily grow hard red winter and hard red spring wheat. Moreover, the dryland production methods in Montana and relatively low rainfall levels (11-16 inches annually) lead to the potential for producing wheat with high protein levels. This is unlike other major hard red wheat production regions, such as Kansas and Nebraska, where higher moisture content during the growing season results in lower protein levels. Consequently, while in these central Great Plains markets all wheat is treated the same and farmers get paid only for the quantity of wheat they grow, in Montana’s wheat markets, processors and elevators differentiate wheat by its quality.

So, how much are protein premiums? Well, just like almost every other answer that you will get from an economist, the answer to this question is: it depends. Just like commodity prices, the amount that processors and elevators are willing to pay for higher protein (higher quality) wheat depends on the production and market conditions at the time that a sale occurs. As I, along with my co-authors Dr. Gary Brester from Montana State University and Dr. Mykel Taylor from Kansas State University, discuss in a recent paper, “Forecasting a Moving Target: The Roles of Quality and Timing in Determining Northern U.S. Wheat Basis,” there are two primary drivers in determining this premium:  (1) how many farmers produced high or low protein wheat in a particular region, such as Montana, and (2) whether the wheat crop in the central Great Plains had an average (or above or below average) protein content.

Unfortunately, there are no direct tools that are currently available (at least those that I am familiar with) that predict protein content. However, because there is a natural biological relationship between wheat yield and its protein content (higher yield typically implies lower protein content vice versa), it is possible to at least get some sense of what protein premiums may be in the northern Great Plains by observing realized yield levels in the central Great Plains (where winter wheat harvest occurs approximately 1 month earlier) and yield forecasts for the northern Great Plains. This information can be readily access from the USDA Wheat Outlook reports. Using the July 2016 report, here is what the market appears to look like.

In 2016, favorable growing and harvesting conditions in the central Great Plains resulted in nearly record high wheat yields. The current estimate is 53.9 bushel per acre yields, which would exceed the previous historical high by 6.1 bushels per acre. Such high yields suggest that the protein levels in central Great Plains’ winter wheat will be lower than average, creating a potential deficit of protein in the overall market. Adding to that is increased yields and production almost in every other major wheat production region around the world. In the northern Great Plains, spring wheat (typically the higher protein wheat) production is expected to be down by 8% due to lower plantings, but yields are expected to higher. Similarly, winter wheat yields are expected to be above average. Both of these factors suggest that, on aggregate, protein levels in Montana and the northern Great Plains are also likely to be low.

The combination of lower protein levels across the Great Plains region suggests that protein premiums are going to be relatively higher this marketing year, in order to increase incentives for farmers to deliver their higher-protein wheat. Conversely, discounts for lower protein wheat will be higher as well. To obtain a more detailed forecast of protein premiums and discounts for the upcoming harvest, visit the Wheat Basis and Price Forecasting Tool, developed to for Montana and Washington marketing locations.

(Photo by gvgoebel is licensed under CC BY 4.0)

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About Author

Dr. Anton Bekkerman is an associate professor in the Department of Agricultural Economics and Economics at Montana State University, joining the faculty in 2009 after completing his PhD at North Carolina State University. Bekkerman's primary areas of research are grain marketing, basis and price forecast modeling, understanding how grain prices are affected by changes in supply chain infrastructures and quality demands, and analyzing the economic trade-offs of adopting alternative dryland cropping systems in Montana. One of his current projects is an investigation of how new grain loading technologies are affecting prices that Montana farmers receive for their wheat. Bekkerman is also examining the economic impacts that Montana's rapidly expanding dry pulse industry will have on the state's crop industry. Although Bekkerman grew up on the east coast, he has recently made a small step toward production agricultural after acquiring three backyard chickens.

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