Wheat harvest
The current projected price increase could put cash wheat prices near the cost of production levels.

For wheat: A bad news and good news scenario

Wheat market is a muddle of good and bad news

The bad news is that the KC March wheat contract price declined to $4.42. The good news is that the $4.40 price support level was not broken, and prices have moved higher. The KC March contract has resistance at $4.64.

An estimate of the long-run price floor for the KC futures contract price is $4.30. The KC nearby (next contract to expire, not counting the delivery period) contract price has not been below $4.30 since May 2006. If by chance, the KC contract price breaks $4.30, the next strong price support level is about $3.75.

The bad news is that the variable cost of production for wheat is somewhere in the $4.50 to $5 range, and Oklahoma and Texas cash prices are below $4. The good news is that cash prices are expected to increase.

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One signal of higher prices is the carry (price difference between nearby and deferred contracts) in the KC wheat contracts. The carry between the March and July contracts is 20 cents. A 55 cent carry is present between the March and December contracts. The KC July 2017 contract price is $5.36, compared to $4.52 for the March 2016 contract.

The 84 cent carry between the KC March 2016 and July 2017 wheat contract prices does not guarantee that the cash price will increase 83 cents between now and July 2017. It just implies that the market expects the price increase.

LESS WHEAT IN INDIA

The good news is that the agriculture ministry of India estimates that country’s planted wheat acres are 4.4 percent less than last year. The bad news is that the ministry predicts that India’s wheat production will be 6 percent greater than 2015.

The good news is that India trade sources project wheat production will be between 6 percent and 16 percent less than 2015. Lower production would be positive (good news) for U.S. wheat prices. Higher production would be negative (bad news).

The bad news is that Russian winter wheat losses due to freeze damage may not be significant. The good news is that Ukraine planted acres are estimated to be about 20 percent less than last year.

Argentina’s new president abolished the export tax on wheat. In addition, there is the relatively high value of the U.S. dollar against the Argentine peso. Abolishing the tax, and the higher dollar value, have resulted in a 25 percent reduction in Argentine wheat prices compared to U.S. prices.

The good news is that an above-average portion of Argentina’s 2015 wheat production was relatively low or below milling quality. The bad news is that Argentine farmers had about one-third of an average crop in storage.

WORLD RECORDS

The bad news includes three years of record world wheat production; record world wheat ending stocks; a dollar value that has increased 20 percent since July 2014 and is the highest since 2003; relatively low crude oil prices, which has had a negative effect on agricultural prices; and relatively high feed grain stocks and low feed grain prices that have resulted in lower wheat prices.

The good news is that world wheat production is projected to be below 2015/16 marketing year production; the world stocks-to-use ratio is 33.6 percent, compared to the 1998 record of 36.1 percent; the value of the dollar is not expected to increase above recent highs; and feed grain prices are thought to be near their bottom.

All this information is uncertain, and may be confusing. The good news is that the market believes — and the odds are — that U.S. hard red winter wheat prices are near the bottom and will increase over the next year. The current projected price increase could put cash prices near the cost of production levels.

For wheat prices to go above the cost of production, world wheat production must decline. Some good news is that the current strong El Niño weather pattern may turn into a strong La Niña, resulting in lower wheat and corn production … and higher prices.

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