Wheat prices at harvest time may depend on the value of the dollar

Wheat prices at harvest time may depend on the value of the dollar.

PLC versus ARC may depend on the dollar index

The most important and uncertain market factor may be the value of the U.S. dollar relative to other currencies, which will likely influence whether PLC or ARC will be the most profitable decision.

At this writing, wheat may be forward contracted for harvest delivery for about $5.10. This price is the KC July wheat contract price minus 40 cents. If the index of the U.S. dollar was the same as it was on July 1, 2014, the harvest forward contract price could be $5.90 or higher.

The value (index) of the dollar against other currencies affects the effective price of U.S. exports. The negative price impact is different depending on the relationship of the U.S. dollar with competing exporters’ currency and the relationship with the buyer’s currency.

For this discussion, the “Trade Weighted U.S. Dollar Index: Broad” published by the Board of Governors of the Federal Reserve System (US) is used. The dollar index is based on the January 1997 index equal to 100. Daily indexes between January 2, 1995, and January 20, 2015, (20 years) are shown in Figure 1.

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The 20 year average index is 108, the minimum index was 89 (May 8, 1995) and the maximum index was 130 (January 25, 2002). Currently, the index of the U.S. dollar to other currencies is 114.4, compared to 101.7 on July 1, 2014, which is a 12.5 percent increase.

If the U.S. dollar indexes for the nearby ICEUS dollar contracts were used, the increase would be about 18 percent. For this discussion, the Federal Reserve published index will be used.

Using a $6.40 price for the Texas gulf export market and a 12.5 percent index increase, the price increase for a foreign buyer or the price decrease for local elevators in Oklahoma and Texas would be about 80 cents.

This result implies that if the current dollar index was 101.7 (same as July 1), wheat prices could be $5.90 rather than the current cash price of $5.10.

Producers are currently deciding whether to sign-up for the PLC or the ARC program. An important price level is $5.50. For the 2015/16 wheat marketing year, the USDA has projected (unofficially) that the average wheat price will be $5.10. If the dollar index was 101.7 rather than 114.4, the 2015/16 marketing year average price would be $5.90.

Figure 1 shows that the dollar index peaked at 114.9 in early March 2009. By June 1, 2009, the index had declined to 103.8. The index was relatively stable between 98 and 104 until September 2014. Technical signals (figure 1) indicate that if the index goes above 115, the index will be expected to continue its upward trend. Closes below 114 may indicate the index will stabilize in the 110 to 115 range or decline back to the 100 area.

We do not know what assumptions the USDA made when projecting $5.10 for the 2015/16 marketing year. We do know that if the index declines, cash prices in Oklahoma and Texas will increase.

Many other market factors negatively impact wheat prices. These factors include above average world wheat stocks and weak economic conditions in many importing countries. Positive signals are also evident. Both U.S. and the world’s wheat stocks-to-use ratios are below average.

Right now, the most important and uncertain market factor may be the value of the U.S. dollar relative to other currencies, which will likely influence whether PLC or ARC will be the most profitable decision.

Sadly, no one knows what the dollar value will do.

 

Figure 1. Index of the U.S. Dollar: Daily January 1, 1995 to February 20, 2015.

Source: Board of Governors of the Federal Reserve System (US)

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