This is not the time to scrimp on nitrogen fertilizer or herbicides. There is excess wheat in the world—yet supplies of wheat with good protein are relatively tight. So for the 2012 wheat crop, the only market for low protein wheat with dockage and foreign material (FM) may be in the feed market—not the food market.
Between January 3, 2011 and December 21, 2011, an Oklahoma wheat basis increased from a minus 88 cents to a minus 8 cents. The higher basis was mostly due to protein demand.
The good news is that the higher wheat basis has resulted in an 80-cent increase in wheat prices. The bad news is that wheat prices could decline 80 cents without a penny decline in the Kansas City Board of Trade (KCBT) wheat contract price.
In the discussion below, a central Oklahoma basis will be used. The basis may be adjusted for Texas. A Texas wheat basis varied between 47 cents lower than the Oklahoma basis on January 3, 2011 and 21 cents lower in June. The current Texas wheat basis is 32 cents lower than the comparable Oklahoma wheat basis.
On January 3, 2011, the KCBT nearby wheat contract (March) price was $8.63. The basis was a minus $.88 and the wheat cash price was $7.75. The cash price was near $9 on February 9, April 25, and May 26. The cash price was below $7 on March 15 and July 7. Between
January 3 and September 30, 2011, Oklahoma wheat traded between $7 and $9.
Since September 30, wheat prices have trended down between $7.31 and $6.22. At this writing, the cash price is $6.60 and the basis is a minus $.08.
Since January 3, the price spread has been between $6.28 and $9.08, a $2.80 price spread. The KCBT Nearby wheat contract has traded between $9.88 and $6.36—a $3.52 spread.
There are three major reasons for the 80-cent basis improvement. First is the higher protein level of the 2011 Oklahoma and Texas wheat crops compared to the 2009 and 2010 crops. The protein premium (higher basis) was supported by lower than normal protein levels in wheat and by lower hard spring wheat production.
U.S. hard spring wheat production was 398 million bushels compared to 570 million bushels last year and a five-year average of 496 million bushels. Canadian and Australian wheat protein levels were below average.
There is an above average supply of wheat in the world. There is a limited amount of wheat with relatively high levels of protein.
Another factor causing the higher basis is tightening corn supplies and high corn prices. The Oklahoma/Texas area entered the 2010/11 wheat marketing year with a substantial amount of low protein wheat. Tightening feed grain supplies created a demand and a higher price for wheat entering the feed market.
The 2011/12 wheat marketing year world wheat harvest is essentially complete. It is a fact that both U.S. and world wheat ending stocks will be higher than last year and well above average. It is also a fact that, even with the higher stocks, there is less protein in the wheat.
This sets the stage for the 2012/13 wheat marketing year crop. Buyers will not have to search for wheat to buy. Buyers will have to search and pay a premium for wheat with acceptable protein levels.
United States winter wheat—especially hard red winter wheat—producers have an opportunity to capitalize on this demand. Flour millers will gravitate to a market that can deliver wheat with relatively high protein and with low dockage and foreign material.