Is the market managing the wheat supply?

Since Oct. 2, Kansas City Board of Trade (KCBT) wheat contract prices have increased about $1. The basis for ordinary (11 percent protein) wheat has increased 22 cents at Kansas City and 40 cents at the Texas Gulf. Cash prices have increased from $1.22 to $1.50.

United States wheat ending stocks are projected to be 885 million bushels, compared to 306 million bushels in May 2008 and a five-year average of 570 million bushels. World ending stocks are projected to be 6.9 billion bushels, compared to 4.2 billion in 2008 and a five-year average of 5.5 billion bushels.

Oklahoma and Texas cash wheat prices bottomed out at about $3.73. The KCBT December wheat contract bottomed out at $4.58.

After bottoming out and given relatively high stocks, why would KCBT wheat contract prices increase $1 and cash prices increase $1.25 or more? Either cash wheat prices should not have declined to the $3.73 level or wheat prices are being artificially increased by outside buyers.

One function of market prices is to manage supply and control demand. Supply is controlled by influencing planted acres. Once wheat is harvested and in storage, price allocates stored wheat to users over the marketing year.

If stocks are tight, like in May 2008, prices are relatively high to ration the scarce commodity. In the winter of 2007, export demand did not decline until wheat prices were above $10.

When stocks are relatively high, like now, prices are relatively low. This allows buyers sufficient opportunity for price increases to cover storage and interest costs. Low prices prompt handlers, users and speculators to purchase wheat. Storage and interest costs are covered by price increases.

During the July through September time period, the market had to convince wheat producers that wheat planted acres needed to be less than last year. With cost of production $3.75 to $4.50 per acre, $3.75 per bushel cash wheat sent a relatively strong signal. Analysts predict that winter wheat planted acres will be less than last year.

Now that U.S. and other Northern Hemisphere winter wheat crops have been planted, the market may be reverting back to allocating stored wheat. The question is, “Is stored wheat worth $3.75, $4.50 or more?"

Many analysts, including me, believe that the recent $1 KCBT wheat contract price increase is largely driven by outside influences. The question is, “Are outside investors ignoring the fundamental (supply and demand) signals?"

I cannot fathom why investment funds would invest without information supporting the investment. Their information may be that wheat prices were just lower than the supply and demand conditions warranted.

Investors may be concerned about inflation and there also may be concerns that food commodity supplies will tighten up.

Inflation could be caused by an increase in the supply of the U.S. dollar and from the U.S. government’s increased spending. Some investors believe a hedge against inflation is to buy commodities.

Decreased production of wheat and other grains could be the result of increased production costs. As the value of the U.S. dollar declines against other world currencies, the cost of fuel, oil, fertilizer and other production inputs will increase. Higher production costs will result in reduced production.

If the above is true, the KCBT March contract will continue to trade above $5.25 and probably above $5.75. The KBCT July 2010 wheat contract will continue to trade above $5.50 and probably above $6.

TAGS: Corn
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