The Chicago Board of Trade lists two domestic wheat futures products: Kansas City Hard Red Winter Wheat (KC HRW), and Chicago Wheat (Chicago). Both products are physically deliverable, with robust and distinct underlying supplies. Underlying KC HRW futures is the national crop of hard red winter wheat (HRW), the predominant class of wheat produced in the United States. HRW is used traditionally in the production of bread, hardy baked goods, and all-purpose flour. Planted in the fall and harvested in the spring and early summer, HRW thrives after overwintering in the cold, snowy, and semi-arid plains of the Midwestern and near-Western United States.

The protein percentage of wheat responds to the growing conditions of the crop. The wheat endosperm, comprising the majority of the wheat berry’s weight, is composed of protein, carbohydrate, vitamins, and minerals. When wheat is grown in wet climates, the endosperm fattens with moisture, resulting in a higher carbohydrate-to-protein ratio. Conversely, wheat grown in dry climates have kernels that appear shriveled, with high-protein endosperm and a lower relative portion of carbohydrate.

Soft Red Winter Wheat (SRW) is the wheat class that typically underlies the Chicago futures contract (though other wheat classes are also deliverable against Chicago futures), has a softer texture due to its higher moisture content, and is used in the production of cakes, cookies, and other fine baked goods. Naturally, soft wheat is grown in wetter climates, such as in the Great Lakes and Eastern regions of the United States and has a lower protein content than does HRW. 

Figure 1: Average farm price, USDA

Historically, HRW has been sold at a premium to SRW due to HRW’s versatility and higher protein content. Figure 1 shows the average annual farm price as reported by the USDA, from the 1998 to 1999 crop year to the present. Until the 2015 to 2016 crop year, HRW commanded more per bushel than SRW each year in the nearly three decades since the beginning of record. 

Figure  2: Front month KC HRW and Chicago wheat futures settlement

The changing dynamic between the two products (with SRW roughly, though not precisely, corresponding to Chicago Wheat futures) is represented in detail in Figure 2, which shows the daily front-month prices of KC HRW and Chicago Wheat futures dating from the acquisition of KC HRW Wheat futures and the Kansas City Board of Trade by CME Group in 2013. The spread between the two (KC HRW minus Chicago) stood firmly above zero until mid-2015, at which point it hovered at or just above parity and dipped negative from 2019 until late 2021. The negative spread that persisted for two years from 2019 to 2021, is attributable to a supply crunch of SRW from poor weather in SRW-producing states and a downward trend of planted domestic acreage under continual national and international demand.

Both HRW and SRW sustained extraordinary spikes in price following the late-February 2022 Russian invasion of Ukraine, as the war was expected to cause a global wheat supply crunch. SRW, which absorbed the shock with greater liquidity, saw a more pronounced spike than did HRW, resulting in the spread registering a low of -187.5 cents per bushel on March 7, 2022. 

Figure  3: HRW and SRW end stocks and stocks-to-use

Figure 3 shows national domestic SRW and HRW end stocks (million bushels) within the context of total domestic disappearance, termed stocks-to-use ratio. Stocks-to-use can indicate the supply and demand dynamics behind commodity prices. Reflective of lower overall production, actual SRW end stocks are exceeded by HRW end stocks by an average factor of 3.5 since reporting began.  

A lower stocks-to-use ratio is indicative of lower supply relative to demand (potentially causing higher prices), while a higher stocks-to-use ratio indicates a higher or more abundant supply relative to demand (potentially causing lower prices). Until the 2004/2005 crop year in which the HRW and SRW stocks-to-use ratios achieved parity, HRW stocks-to-use exceeded SRW stocks-to-use each year since the onset of record keeping 20 years prior. HRW stocks-to-use once again exceeded SRW after 2011/2012 and stocks-to-use for both HRW and SRW climbed significantly from 2014 to 2018, after which both HRW and SRW ratios experienced declines. HRW stocks-to-use exceeded SRW stocks-to-use more significantly than they had in 15 years at the time SRW pricing overtook HRW prices in 2019, as the SRW stocks-to-use decline of recent years, indicative of tightening supply, preceded that of HRW.

Figure  4: HRW and SRW exports and exports as percent of production

Exports comprise an important share of disappearance. Historically, not only has a greater volume of HRW been exported, but a greater share of domestic production is exported. On average over the last three decades, 47% of domestic HRW was exported, compared to only 40% of SRW. The USDA predicts that the new crop year of 2022/2023 will see a pronounced, though not extreme uptick in export share for SRW, and a flat export share for HRW compared to the current old crop year, 2021/2022. See Figure 4

Figure  5: World wheat production relative to end stocks

While the United States has seen a downward overall trend of wheat production over the last decades with wheat-growing land ceded to more profitable corn and soybeans in the second half of the twentieth century, global wheat production has more than trebled. Although the U.S. share of global production has accordingly declined, Chicago and KC HRW futures prevail as global benchmarks, more integral than ever to price discovery in regional wheat markets around the world.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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