Should producers risk a 50 cent lower price plus 25 cent storage and interest costs by storing wheat and betting on higher prices (rock), or sell at the current low price (hard place)?
At this writing, Oklahoma and Texas Panhandle producers can forward contract harvest delivered wheat for about 70 cents less than the KC July contract price. If yields are higher than expected and/or if quality (test weight and other milling characteristics) are low, the basis could decline about 30 cents (with a small probability for a 50 cent decline).
The KC July wheat contract ($4.55) has strong price support at $4.30, which implies about a 25 cent futures price risk. A 25 cent loss in the futures contract price and a 30 cent loss in the basis would result in a 55 cent loss (risk) in cash prices.
Oklahoma and Texas wheat prices could be $8.00 by Dec. 1. On June 9, 2010, the Dacoma, Okla., wheat price was $3.36 ($3.43-Perryton). The price was $5.68 Aug. 2, $6.17 Sept. 1, and $7.03 Nov. 8. During the 2010/11 marketing year, wheat prices peaked at $9.00 ($8.73-Perryton) Feb. 9, 2011.
In May 2010, U.S. wheat production was projected to be 2.067 billion bushels (2.136 bb average), and 2010/11 wheat ending stocks were projected to be 997 million bushels (593 mb average). World wheat production was projected to be 24.7 billion bushels and ending stocks 7.3 billion bushels.
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In November 2010, U.S. wheat production was projected to be 2.210 billion bushels (143 million bushels higher), and 2010/11 ending stocks were projected to be 848 million bushels (149 million bushels lower). World wheat production was projected to be 23.6 billion bushels (down 1.1 billion bushels), and ending stocks 6.3 billion bushels (down 1.0 billion bushels).
Lower than expected world production resulted in increased U.S. wheat exports and a $3.67 price increase into November 2010 and a $5.64 price increase into February 2011. Note that wheat prices increased even through U.S. production was 143 million bushels higher than expected. The price increase was the result of lower than expected world production.
For the beginning of the 2016/17 wheat marketing year (June 1), Oklahoma and Texas Panhandle prices are expected to be about $3.85. Expected U.S. production is 2.0 billion bushels (2.1 bb average), and expected world production is 26.7 billion bushels (26.0 bb average and 26.9 bb in 2015/16).
Higher wheat prices are mostly dependent on quality and lower than expected world production. Wheat quality may be the most important price element. Without milling quality wheat, there will be no buyers.
For the 2015/16 marketing year, hard red winter (HRW) wheat ending stocks are projected to be 425 million bushels, compared to 294 million bushels in 2014/15, and a five-year average of 323 million bushels. A large percentage of the HRW wheat in storage is relatively low test weight and has below average milling characteristics.
Above average milling quality for 2016 wheat should result in increased demand and higher prices. Quality alone could result in 75 cents to $1.00 higher prices.
For prices to increase, as observed in the June through February 2010/11 time period, 2016/17 world wheat production needs to be 25 billion bushels or less. 2016/17 world wheat ending stocks are projected to be a record 9.45 billion bushels (7.6 bb average). World wheat ending stocks need to be below 8.0 billion bushels.
History shows that $3.00 to $5.00 price increases don’t happen very often. But, these price increases do happen. The question is, do you accept the current low price (rock) or risk lower prices to take a chance on higher prices (hard place)?