“Biggest Ever Russian Grain Crop” (Bloomberg News); “SovEcon hiked its wheat crop forecast to 64 MMT” (ProFarmer); “UkrAgroConsult has raised its forecast for Ukraine's 2016 wheat harvest to 22.0 million tonnes” (Reuters News); “Argentine wheat planted acres projected to be 30 percent higher than last year” (Exon). “Australia's 2016 wheat harvest will be the best in five years, National Australia Bank said.” These are just a few headlines that imply that world wheat production expectations have been increasing.
The USDA May WASDE report projected world wheat production to be 26.7 million bushels (726.7 million metric tons). This amount is up from International Grain Council’s 26.1 million bushels projection made a few months earlier.
It appears that world wheat production will be at least the second highest on record (27 billion bushels in 2015/16). The good news is that world wheat use is projected to be a record 26.2 billion bushels.
World wheat ending stocks are projected to be a record 9.46 billion bushels compared to a five-year average of 7.6 billion bushels. United States wheat ending stocks are projected to be 1.03 billion bushels, the highest since 1987.
With all the bad news, KC nearby wheat contract prices have remained in a sideways pattern between $4.30 and $5. At this writing, the KC July wheat contract price is trading between $4.40 and $4.70 and is priced near $4.55.
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For the Oklahoma and Texas panhandle areas, the basis has remained mostly between minus 90 and minus 80 cents. The basis for Oklahoma wheat (excluding the panhandle area) is near a minus 70 cents. Enid, Oklahoma, sub-terminal elevator basis is a minus 45 cents. During the last month, the basis has been relatively stable.
At this writing, cash wheat prices are $3.86 in Medford and Altus, Oklahoma, $3.76 in Perryton, Texas, and $4.11 in Enid, Oklahoma.
Indications are that cash wheat prices bottomed out at about $3.50, and KC wheat futures prices at $4.30. A large U.S. and world wheat crop could pressure prices back to the bottom area.
MARKET EXPECTS LOW PRICES
At this writing, the KC July wheat contract price is near $4.60, the September wheat contract price is $4.76, and the December contract price is $5.00. With carry costs (storage and interest) estimated to be 5 cents per bushel per month (30 cents between now and December 1), the market is offering more than full carry (40 cents) to own wheat.
The KC July 2017 wheat contract price is $5.32, or 71 cents above the KC July 2016 wheat contract price.
The implication is that the market expects relatively low wheat prices to reduce world wheat production in the 2017/18 wheat marketing year. Relatively high wheat prices in the 2010/11 through 2014/15 wheat marketing years were profitable for most world wheat producers. No matter which country a wheat producer is in, a few years of low prices need to occur to favor lower planted acres and to reduce wheat production.
Unless 2016/17 world wheat production is significantly less than expected, Oklahoma and Texas wheat prices are not expected to increase more than 40 to 60 cents between now and December. Wheat production greater than expected could result in wheat prices remaining in the current sideways pattern.
Recent news reports indicate relatively high wheat production. The market’s price reaction—prices remaining in the current sideways pattern rather than continuing the downtrend—is good news.