Based on the Kansas City Board of Trade July wheat contract price ($5.20) and a minus 80-cent basis, the market is offering about $4.40 for June 2010 delivered wheat. This price is based on 2010 expected wheat production of 1.95 billion bushels and 2010-2011 marketing year ending stocks of 940 million bushels.
Some market analysts have estimated 2010 U.S. wheat production to be closer to 2.0 billion bushels. Production estimates are based on 37.1 million acres winter wheat acres and 16.7 million acres of spring wheat. For the 2009 wheat crop, 43.3 million acres were planted to winter wheat, and 15.8 million acres of spring wheat were planted.
The March 1 USDA crop condition reports indicated that Oklahoma, Texas and Kansas wheat crops are in better condition than last year. Oklahoma has 60 percent good to excellent compared to about 42 percent last year. The wheat condition index for Texas was is 68 compared to 34 last year.
The Kansas wheat crop condition is rated 53 percent good to excellent compared to about 39 percent last year.
In Oklahoma and Texas, prices tend to bottom out in late July and early August. Prices tend to peak between October and January.
The USDA projects the 2010-2011 wheat marketing year average price to be $4.90 compared to a projected $4.85 for the 2009-2010 wheat marketing year. Oklahoma and Texas’s average annual wheat prices average about 15 cents less than the average U.S. wheat price.
If the wheat production estimates are correct, Oklahoma and Texas wheat prices may bottom out in July near $4. Then prices will trend higher throughout the 2010-2011 marketing year. The logic is, that, for wheat prices to average $4.75 for the marketing year ($4.90 U.S. average minus 15 cents), fall and winter prices must be above $4.75 to offset the relatively low harvest prices.
Storage and interest costs are expected to be about 6 cents per bushel per month. This cost is based on 4 cents per bushels per month (0.133 cents per day) storage costs and about 2 cents per month for interest. Storing wheat for five months, July through November, would cost about 30 cents per bushel.
If the June price averages $4.40, then the November price would have to be at least $4.70 or higher to make storing wheat profitable ($4.40 + $0.30 storage and interest cost). Current price forecasts indicate that prices will gain more than the required 30 cents.
Experience has shown that wheat production and prices rarely turn out as expected. If production is higher, prices tend to be lower and vice versa. The worst case scenario may be for low production and slightly higher prices.
While the U.S. winter wheat crop is important and has an impact on world wheat supplies, U.S. winter wheat production is only 6.6 percent of the world’s wheat production. With world wheat ending stocks of 7.2 billion bushels and U.S. wheat ending stocks of 981 million, the price impact of losing a few million bushels of wheat would not last very long.
Oklahoma (128 million bushels) and Texas’ (98 million bushels) wheat production added together is less than Kansas wheat production (325 million bushels). In 2009, both Oklahoma and Texas had relatively low yields. Wheat prices went from $5.75 in June to $4 by early September.
A minor price impact occurred because wheat production in the rest of the U.S. and the world was mostly above average.
The important point is that the 2010-2011 wheat price trend is normally set in late August and early September. Current conditions imply that the highest hope for relatively higher prices is during the September through December time period.
Nothing is guaranteed. But, betting with the odds tends to pay off in the long-run.