There are several positive signs that wheat prices may have bottomed out. The Kansas City Board of Trade September wheat contract price has spent the last two weeks near $3.10 and the cash basis has improved 5 cents per bushel. The fact that the Kansas wheat crop may not be as large as expected two weeks ago may also support wheat prices.
Wheat prices are expected to wallow around for the next few weeks and then start an up trend. Prices normally bottom out in early August. Central Oklahoma and Texas panhandle wheat prices are expected to be between $3 and $3.30 by December.
Given that carry (storage and interest costs) is 3 to 3.5 cents per bushel per month and that cash prices are below the government loan, storing wheat is more attractive than normal. Commercial storage cost between 2.5 and 3 cents per bushel per month and interest cost for wheat in the government loan is about one-half cent per bushel per month.
Storing wheat the 4.5 months until December will cost about 16 cents per bushel. If the price stays below the loan, there will be no interest cost and the carry cost will be about 13 cents per bushel. Given an expected 25-cent price increase and a potential 50-cent price increase, 13-cent price risk until Dec. 1 looks relatively attractive.
Another reason to store wheat is the direct government payment. The direct payment is based on the national average annual wheat price. For every cent the average annual wheat price is above the loan, the direct payment is reduced by an equal amount. If prices increase between now and December, having the opportunity to sell at the higher price will offset part of the direct payment loss.
Some producers are considering selling wheat and buying KCBT December wheat call option contracts. A KCBT “at the money” (320) Dec call option contract cost about 19 cents per bushel. This is 3 to 6 cents per bushel more than the cost to own wheat in commercial storage and in the government loan.
One problem with call option contracts is that they only capture increases in the futures contract price. Any cash price increase due to a higher basis is not captured with an option. Owning cash wheat captures both higher futures prices and basis.
In that wheat prices are below the loan rate, any price decline will be offset by an increase in the loan deficiency payment (LDP). This limits cash price risk to the 13- to 16-cent carry cost.
The marketing year wheat price trend is normally set in late August and early September when most of the foreign crop is harvested. This year is not expected to be different.
Wheat prices changes will be a function of U.S. spring wheat and corn production and the size of the foreign wheat crop. The USDA projects that other spring wheat plantings are 12 percent less than last year. Durum wheat planted acres is expected to be down 4 percent.
Corn planted acres is expected to be the same as last year. There is some concern about hot weather reducing corn yields. Lower corn production would be positive for wheat prices.
Foreign wheat production is projected to be 18.5 billion bushels compared to 19.1 billion bushels last year. Current world wheat production expectations are for production to decline for the fifth year in a row.
United States stocks are about average and world stocks are tight. Lower than expected foreign wheat production will cause U.S. wheat prices to increase. The stage is set for $4 or maybe even $5 wheat. However, to reach $4 or $5, foreign wheat production must be below 18 billion bushels.
Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call (405) 744-6082, or e-mail: [email protected].