The Kansas City Board of Trade (KCBT) July 2008 (yes 2008) wheat contract price is $4.80 and the KCBT July 2007 wheat contract price is $4.96. The 16-cent difference in the contract prices is probably due to expected increases in handling, storage and transportation costs.
Some Oklahoma and Texas elevators are offering forward contracts for June 2007 delivered wheat for about 40 cents less than the KCBT July wheat contract price. Thus, for a KCBT July wheat contract price of $4.96, the forward contract price would be $4.56.
A few elevators are offering forward contracts for June 2008 delivery at 50 cents under the KCBT July 2008 wheat contact price ($4.30). Producers have asked, “Should we price 2007 and/or 2008 wheat?” and “How long will it take for U.S. and world wheat stocks to increase, which will result in lower prices?”
The answer to the last question provides the information to answer the question of whether or not to forward contract 2007 and 2008 wheat.
Ethanol production and corn demand has changed, and continues to change, the grain marketing system. Some U. S. corn producing areas that have historically exported corn to deficit U.S. areas are now importing corn. This change has had a major impact on truck and rail transportation services and on the price of corn.
For the 2006/07 corn marketing year, 2.15 billion bushels of corn are projected to be used for ethanol production. With the third largest corn crop ever and beginning stocks of 1.97 billion bushels, corn ending stocks are projected to be 935 million bushels. Over 1.04 billion more bushels of corn are projected to be used than were produced this year.
During the 2008/09 marketing year, where will the market get the extra one billion bushels? Estimates are that five to eight million acres of crop land must be bid out of soybean and wheat into corn. To buy this land, corn prices must remain relatively high.
Currently, wheat is being priced as a food grain, and corn is being priced as a feed and ethanol grain. The two markets and prices are separate. However, if wheat prices fall and/or corn prices increase, then corn prices will create a floor for wheat prices.
Corn delivered to a feed mill in central Oklahoma and to feed lots in the Panhandle cost about $4.25 per bushel. Wheat will enter the feed market when wheat prices are about the same as corn prices.
Chicago Board of Trade (CBT) corn contract prices are above the CBT March contract price ($3.73) through July 2008. This implies that the market believes that corn prices will remain at current levels for at least two years. Corn prices may provide a wheat price floor at $4.25 through the 2008 wheat harvest.
For wheat prices to go below $4.25, both the corn and wheat supplies must increase. During the 2007/08 wheat marketing year, U.S. wheat stocks may increase to 100 million bushels. In a normal market, U.S. wheat ending stocks of $5.40 would result in $3.50 wheat prices. However, if corn stocks remain low and corn prices stay high, wheat will move into the feed market, wheat stocks will not increase to 530 million bushels, and wheat prices would remain relatively high.
Another factor that must be considered is that both U.S. and world wheat stocks are tight and a below average U.S. and/or world wheat crop would result in higher wheat prices. At this writing, the market is betting that wheat prices will remain at current levels through July 2008.
Price risk is limited by both tight wheat stocks and tight corn stocks. Ethanol production is expected to increase, which is expected to keep corn stocks tight. Both of these factors limit downside price risk through July 2008.
If the U.S. and/or world wheat crop is below average, wheat prices could increase $1 or more. There appears to be about a 50-cent downside price risk and a $1 upside price potential.
If you cannot afford a 50-cent price risk, forward contract some wheat. If you can afford the risk, wait and see what happens.