Peter Mckeegan, Top Third Ag Marketing, said, “You don’t short (sell) a sleeping market.” At this writing, the KC December wheat contract price has traded between $6.87 and $7.04 for the last two weeks. Wheat prices have just been wallowing around and slowly sinking lower.
Since late June, each new low price was lower than the last low price, and each price peak was lower than the last price peak. To break this slight downtrend, the KC Dec. contract price must close above $7.27 for two consecutive days.
The Federal Reserve Bank’s announcement that the QE program (Quantitative Easing: the Fed increases the money supply by buying government or other, securities) would continue. The QE program may be partially responsible for higher wheat prices.
More money (increased money supply) in the economy has the potential to create inflation. Inflation may cause the U.S. dollar value to decline relative to other major currencies.
A lower dollar value results in relatively lower U.S. commodity export prices. Relatively lower commodity export prices may result in increased export demand, which may result in higher domestic prices.
One method for investors to hedge against inflation is to buy storable commodities, which increases demand. Increased demand normally results in higher commodity prices.
Wheat export demand has remained relatively strong. At this writing, the bushels of all classes of wheat sold for export is 38 percent greater than at this time last year. The amount of hard red winter wheat sold for export is 32 percent greater than last year, and for soft red winter wheat sold for export, the amount is 210 percent higher than last year.
A relatively strong export demand may be the cause of the relatively high basis. The Oklahoma wheat basis is 40 cents to 45 cents higher than at this time last year. The Texas panhandle basis is from 50 cents to 65 cents higher than last year. The Texas basis may still reflect feed demand for wheat.
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Without a strong export demand and the feed demand for wheat, Oklahoma and Texas wheat prices could now be 40 cents to 65 cents lower than current cash wheat prices.
Another positive price factor is protein. Oklahoma and Texas panhandle hard red winter wheat has relatively high protein levels. Some of the wheat protein is too high for local flour mill use. But high protein wheat is in demand for export.
The 2013/14 marketing year hard red winter wheat ending stocks are projected to be 197 million bushels compared to 343 million bushels for 2012/13 and a five-year average of 337 million bushels. Dry planting conditions for hard red winter wheat with tight stocks may also be supporting current prices.
Negative price signals include projected record world wheat production and record U.S. and world corn production. World wheat production is projected to be 27 billion bushels. World wheat ending stocks are projected to increase 1.4 percent to 6.48 billion bushels.
Also weighing heavily on wheat prices is record U.S. and world corn production. A 14 billion bushel U.S. corn crop is projected to increase U.S. corn ending stocks from 661 million bushels to 1.855 billion bushels, a 280 percent increase.
The odds are that wheat prices have established the low price for the next few months. How long prices will stay in the current range will depend on hard red winter wheat planting conditions and how the Argentine, Australian, and South African wheat crops match current production expectations.
Until more of the market wakes up, it is probably better not to “short a sleeping market.”