At this writing, the spreads (differences) between the Kansas City Board of Trade wheat contracts cover wheat storage and interest costs. The spread between the May and July contract is 10.5 cents. There is a 29-cent spread between the July wheat contract and the December contract.
Producers pay about 4 cents per bushel per month to store wheat in commercial warehouses. Interest costs are about 2 cents per month and are based on $4 wheat and 6 percent interest. If CD interest rates are used, interest costs are about 1 cent per bushel per month.
The total cost for a producer to store wheat in a commercial warehouse is 5 to 6 cents per month. It costs 10 to 12 cents per bushel to store wheat until June. The cost to store wheat from mid-June to mid-November would be 25 to 30 cents per bushel. The KCBT wheat futures market is offering right at this amount.
The KCBT wheat futures contract price is only part of the cash price equation. The cash price is equal to the KCBT “nearby” wheat futures contract price plus the basis. In Oklahoma and Texas, the basis is normally negative, so the cash price is determined by subtracting the basis from the futures contract price.
In March 2009, the cash wheat basis was a minus 89 cents in southern Oklahoma and a minus 55 cents in central and northern Oklahoma and in the Texas Panhandle.
In late March 2009, wheat could be forward contracted for the KCBT July wheat contract price minus 89 cents in southern Oklahoma, and minus 55 cents in northern Oklahoma and the Texas Panhandle. The market was transitioning from a market with tight stocks to a market with average to excess stocks. Wheat stocks were projected to be 712 million bushels compared to 306 million bushels in 2008.
In the June 2009 reports, the USDA estimated 2008-2009 wheat marketing year ending stocks to be 669 million bushels and 2009-2010 marketing year wheat ending stocks to be 647 million bushels. The June 2009 basis was minus 62 cents in southern Oklahoma, minus 45 cents in northern Oklahoma and minus 60 cents in the Texas Panhandle.
In the November 2009 reports, the USDA estimated 2009-2010 wheat marketing year ending stocks to be 885 million bushels. The basis had declined to a minus 92 cents in southern Oklahoma and a minus 85 cents in northern Oklahoma and the Texas Panhandle. The basis had essentially declined enough to offset the positive spread (storage and interest payment) in the KCBT July 2009 and December 2009 wheat contract prices.
The 2009-2010 marketing year was a transition from the relatively low stocks in 2008-2009. The 2010-2011 marketing year (June 2010 through May 2011) is expected to be a year of level (excess) stocks or possibly increased stocks. In this case, the basis may follow traditional patterns.
At this writing, wheat may be forward contracted in southern Oklahoma for about $1 less than the KCBT July wheat contract price. The harvest contract basis in northern Oklahoma and the Texas Panhandle is a minus 85 cents. The forward contract basis is the same as the current cash price basis and these basis have not changed much since November.
Both the basis and the KCBT wheat futures contracts imply that the market is ambivalent about buying wheat. Nearly the same price is offered (after storage and interest) now, and in July and December. Commercial buyer’s storage costs are about one-half of the producer’s costs, and their interest costs are about 50 percent higher. These figures imply that merchandisers may buy wheat, hedge it, and receive a few cents from storage.
With excess wheat stocks, the odds are higher that the basis will improve (relatively higher cash price relative to the futures price), which also supports potential storage return to commercial buyers.
The message to producers? Unless wheat stocks are reduced, any increase in wheat prices will be required to pay for storage and interest.