Wheat prices have declined about $2.20 over the last four months, $1 in the last month, and $0.59 in the last three days. Yet, it may still be a good time to price wheat. The decision depends on the current price relative to historical prices, how much lower prices can go, and what the current price means to the decision maker.
At this writing for harvest delivery, Oklahoma and Texas Panhandle producers may forward contract (hedge) wheat for about $6.95. This harvest forward contract price ($6.95) is based on a minus 40 cents basis the Kansas City Board of Trade July wheat contract price ($7.35 minus 40 cents).
June wheat prices averaged $8.14 in 2008, $5.87 in 2009, $3.72 in 2010, $7.93 in 2011, and $6.42 in 2012. The range of the average June prices was $3.72 in 2010 to $8.14 in 2008. June prices have averaged $6.42. Compared to $3.72 (the low price), or maybe even $6.42 (the average price), $6.95 may still provide an acceptable 2013 harvest forward contract price.
Wheat prices could theoretically decline to zero, but a zero price is not realistic. The odds that 2013 wheat harvest prices would even reach $3.72 are very close to zero. Some analysts contend that June 2010 wheat prices were driven lower than expected by the funds liquidating or reversing long futures’ positions.
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The funds are not holding excess long futures positions as they were in 2010. The point is that there is about a 20 percent chance that June 2013 wheat prices could fall to the $4.50 range.
The “benchmark” harvest price of $6.95 is based on average 2013 U.S. winter wheat production. Winter wheat production is composed of soft red winter wheat production, which is expected to be about 22 percent above the five-year average of 420 million bushels, and hard red winter (HRW) wheat, which is expected to be about 4 percent below the average of 942 million bushels.
Much of the HRW wheat area was planted under D3 and D4 (the highest two drought ratings), entered winter under record poor to very poor growth condition ratings, and suffered freeze damage in some areas of Texas and Oklahoma. Above average HRW wheat production, which is still possible, could result in Oklahoma/Texas wheat prices being below $6.
During the ongoing wheat marketing year (June 2012 until now), very short corn supplies may have added 75 cents to $1 to the price of wheat. At this writing, corn ending stocks are projected to be between 800 and 900 million bushels.
2013 corn production is projected to be over 14 billion bushels, which could result in 2013/14 corn ending stocks being near 2.0 billion bushels. With corn ending stocks of 2.0 billion bushels, CBT corn futures contract prices may decline into the low $5 range.
One point that must be remembered about 2013 corn production resulting in higher corn stocks is that corn stocks cannot increase until the corn is harvested in September and October. To keep wheat from going into the feed market, wheat prices must stay above corn prices. And, the big decline in corn prices is not expected until the August/September time period.
If HRW wheat production is above 940 million bushels, and the corn crop conditions in June indicate a 14 billion bushel corn crop, Oklahoma/Texas cash wheat prices could easily be near $6. The odds of this may only be 30 percent, but it is possible.
If a producer can’t afford to sell wheat for, say, $6.25, than $6.95 is a good opportunity to forward price wheat.