At this writing, Oklahoma and Texas wheat producers may forward contract wheat for harvest delivery at about $5.30. Harvest forward contract basis are between a minus 75 cents and a minus $1.20.
To determine the forward contract price at a specific elevator, call the elevator and ask for the harvest forward contract basis. (For this example, assume the basis is a minus 80 cents.) Anytime you want to know the forward contract price, check the KCBT July wheat contract price and subtract the basis from the quoted prices ($6.10 KCBT July wheat contract price - $0.80 basis = $5.30).
Producers that want to set a minimum price with a put option contract could buy an “at-the-money” ($6.10 at this writing) KCBT July wheat put option contract for about $0.65. Using a minus 80-cent basis, the resulting minimum price would be $4.65. This is below the costs of production.
A problem is that prices are low because wheat stocks are high. The only reason for prices to increase is if wheat stocks decline or are expected to decline. Wheat stocks will only decline if the 2009-2010 wheat production is less than 2009-2010 wheat use.
During the last five years, domestic wheat use has ranged from 1.05 billion bushels to 1.26 billion bushels and averaged 1.15 billion bushels. Domestic wheat use for flour has increased annually from 910 million bushels, in 2004-2005, to 950 million bushels, in 2008-2009, and domestic use averaged 932 million bushels. The five-year average feed use was 141 million bushels. Seed use averaged 81 million bushels.
United States wheat exports have ranged from 908 million bushels to 1.264 billion bushels. The five-year average exports are 1.048 billion bushels.
Total U.S. wheat use has a five-year average of 2.2 billion bushels.
The USDA estimates 2008-2009 wheat marketing year ending stocks to be 656 million bushels. In the February USDA Supply and Demand Reports, the USDA may raise the ending stocks estimate to about 680 million bushels.
The five-year average of U.S. wheat ending stocks is 510 million bushels. For U.S. 2009-2010 marketing year wheat ending stocks to decline to 510 million bushels, total 2009 U.S. wheat production must be less than 2.1 billion bushels. United States 2008 wheat production was 2.5 billion bushels and the five-year average is 2.12 billion bushels.
World wheat ending stocks are projected to be 5.45 billion bushels compared to a five year average of 5.09 billion bushels. For world wheat ending stocks to decline to 5.09 billion bushels, 2009-2010 world wheat production must be 360 million bushels less than use.
The world’s five-year average production is 23.1 billion bushels compared to 25.1 billion bushels in the 2008-2009 marketing year. The world’s five-year average wheat use is 22.9 billion bushels.
For world wheat ending stocks to decline to 5.09 billion bushels, 2009-2010 world wheat production needs to be less than 22.5 billion bushels. This is 600 million bushels or 2.6 percent less than the five-year average production.
The odds that U.S. and world wheat production will be less than last year are nearly 100 percent. United States winter wheat planted acres are 9 percent less than last year. The planted wheat is not in as good condition as last year. In 2008, weather patterns supported above average yields. The same is not the case this year.
The problem is that for wheat prices to increase, wheat production needs to be significantly below average. The odds of 2009-2010 wheat being significantly below average are less than 50/50.
For prices to increase, a wheat crop failure is needed — somewhere else!