There I was innocently minding my own business and out of nowhere came a 24.5 cent price increase. For a couple of weeds, the KCBT March wheat contract price was wallowing around between $5.15 and $5.25. Was this price increase “Fact or Fiction?”
Market analysts attributed the 24.5 cent price increase to freezing weather over much of the winter wheat area. It was also mentioned that the Funds bought 4,000 wheat contracts (20 million bushels). The Funds' purchase was between Christmas and New Year’s Day. Trading volume was relatively low.
Other market chatter predicts that the Funds will “balance” after New Year’s Day by buying contracts. Some speculators and hedgers have been reported to be buying in front of this expectation. But, it is dangerous trying to outguess Mother Nature or the funds.
By the time you read this, the first week of January will be history and you will know the “rest of the story.” The following is what you should be aware of.
Watch the KCBT March contract. At this writing, the KCBT March contract price is about $5.40. The contract has price resistance at $5.45 and support at $5.10.
On Jan. 12, the USDA releases the Winter Wheat Seedings, Grain Stocks, and Weather-Crop Summary reports. These reports provide estimates of current wheat supply and of 2010 winter wheat production. USDA’s corn supply estimates could also impact wheat prices.
If the KCBT March contract price is between $5.10 and $5.45 after the Jan.12 reports, don’t expect much price movement until wheat comes out of dormancy in late February and early March.
If the KCBT March contract price is above $5.45, the next price resistance (target) is about $5.95. Contract prices below $5.10 imply a potential price decline to about $4.75.
Two price factors that will not be in the Jan. 12 reports are wheat export sales and corn prices. Wheat export demand is not expected to get any worse. All wheat sold during the 2009-2010 marketing-year for export is 27 percent less than last year. Twenty-seven percent is well below USDA’s projected 14 percent decline in export sales.
Hard red winter wheat export sales are 43 percent less than last year compared to USDA’s projected 27 percent decline. Soft red winter wheat export sales are 51 percent less than last year. Only white and durum wheat export sales are higher than at this same time last year.
If the wheat/corn price spread narrows (corn prices gaining on wheat), feed demand for wheat may increase. During the last few weeks, corn prices have gained about 40 cents and wheat prices about 30 cents. The corn price increase was over a three-week period while wheat prices increased 24.5 cents in one day.
As you evaluate wheat prices, remember that the wheat supply is well above average and that wheat demand is below average.
The U.S. wheat stocks-to-use ratio (ending stocks divided by annual use) is projected to be 43 percent. Compare this to 13.2 percent for the 2007-2008 marketing year. Forty-three percent is the highest ratio since the 1987-1988 wheat marketing year.
The world’s wheat stocks-to-use ratio is projected to be 29.5 percent. This may be compared to 19.6 percent for the 2007-2008 marketing year. This is the highest since than 2001-2002 marketing-year ending stocks of 34.5 percent.
With abundant wheat stocks, relatively weak wheat demand, and adequate corn supplies, there is little reason to expect wheat prices to go much higher. If the KCBT March wheat contract price is below $5.45, the odds of higher prices are relatively low and the 25-cent price increase is probably fiction.
If 2010 U.S. winter wheat production is less than 1.5 billion bushels and world wheat production is less than 23 billion bushels, the 2.45 cent price may be a relevant fact.