Higher prices reflect lower stocks

Some people say the market should raise prices to reflect tighter wheat stocks. The fact is that the market is offering higher prices.

This time last year the Texas gulf wheat price was $3 per bushel and the Kansas City Board of Trade July wheat contract price was $2.98. The basis was 2 cents per bushel.

At this writing, the Texas gulf wheat price is $3.67 and the KCBT July contract price is $3.30. The current basis is 37 cents. Note that the futures contract price is about 32 cents per bushel higher than last year and the basis is 35 cents per bushel higher than last year.

Combined, the higher basis and the higher futures contract price produce a 67 cent per bushel higher cash price than last year. The 67-cent higher price is the result of U.S. wheat ending stocks falling from 950 million bushels to 830 million bushels and world ending stocks declining from 4.6 billion bushels to 4.2 billion.

The market also predicts higher prices for next November. The KCBT wheat December contract price ($3.48) is 18 cents higher than the KCBT July contract price ($3.30).

The average basis change between June and November is a16 cents per bushel increase. Adding the 18 cent KCBT December price advantage to the 16 cent average basis increase produces an expected 34 cent per bushel price increase between June and November.

This implies that the market believes wheat stocks will continue to decline during the 2001/02 wheat-marketing year (June 1, 2001 through May 31, 2002). The question is how much?

U.S. wheat production estimates for the 2001/02 marketing year crop range between 1.9 million and 2.1 billion bushels. Even the highest estimates are less than last year's 2.22 billion bushels and the 10-year average production of 2.37 billion bushels. The five-year average for U.S. wheat production is 2.36 billion bushels.

With last year's 2.22 billion-bushel wheat crop, U.S. wheat ending stocks fell about 120 million bushels. Some analysts are predicting that U.S. ending stocks will decline 200 to 300 million bushels.

U.S. wheat ending stocks need to fall below 690 million bushel to be below the five-year average and below 640 million bushel to be below the 10-year average. A 200 million reduction in ending stocks is 630 million bushels.

Both U.S. corn and world wheat stocks will impact U.S. wheat prices. Corn stocks are projected to be 2.0 billion bushels, the highest since 1992. Given that 300 million bushels of wheat are fed each year, high corn stocks and low corn prices could lower the amount of wheat fed and have a negative impact on wheat stocks.

World wheat ending stocks are projected to be 4.2 billion bushels. This is 400 million bushels below average and 300 million bushels above the 3.9 billion bushels that resulted in $7 wheat prices. The difference between 1995'ís 3.9 billion-bushel world wheat ending stocks and potentially lower world ending stocks on May 31, 2002 is that U.S. wheat ending stocks were only 379 million-bushels on May 31, 1995.

The 2001/02 wheat-marketing year has the potential to produce $4 to $5 wheat prices. The market is already predicting $3.80 at the Texas gulf for November 2001 (KCBT $3.48 + $0.41 basis). Less than expected U.S. and foreign wheat production could easily add $1 to $1.50 to wheat prices by Dec. 1.

The weather is the key too higher prices. Any problems with the foreign wheat crop will result in higher demand for U.S. whea.

Key price levels to watch with the KCBT July wheat contract are $3.30 and $3.45. Prices below $3.30 imply that wheat production estimates are increasing and prices above $3.45 imply that wheat production estimates are declining.

Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail: [email protected]

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