At this writing, the Kansas City July '06 contract price is $4.54, the July '07 contract price is $4.56 and the July '08 contract price is $4.59. These July contract prices imply that the market is willing to pay about $4.20 per bushel for the next three wheat crops.
These contract prices could also indicate that the market thinks that wheat prices will be relatively stable and flat. It does not take a market guru to know that wheat prices will not remain stable nor flat for the next three years. The question being asked is “Why are KCBT July wheat contract prices relatively high through July '08?”
Reasons may include relative tight U.S. and world wheat stocks, high fuel and fertilizer prices, some meteorologists projecting continued dry conditions, index funds trading commodities and increased corn used for ethanol production.
Since 2000, world wheat stocks have declined from 7.6 billion bushels to 5.3 billion bushels in 2005 and are projected to be 5.8 billion bushels in 2006. United States' wheat ending stocks have declined from 876 million bushels in 2000 to a projected 577 million bushels in 2006.
By the time this article is printed, the USDA will have released the 2006/07 projected ending stocks. It will take 2006/07 wheat ending stocks in the 460 million bushel range to keep wheat prices above $4.
Relatively high fuel and fertilizer costs could result in marginal acres being taken out of wheat production and less fertilizer applied to planted acres. Both actions would result in lower production and potentially increased yield variability.
One way the market influences the number of acres planted to wheat and the amount of fertilizer used is through price. Higher prices can make planting marginal acres and applying higher levels of fertilizer profitable. The market will raise or lower wheat prices to adjust production to meet demand.
Some meteorologists are projecting dry conditions for the next few years over much of the winter wheat areas. This could result in lower production and maintain relatively tight wheat stocks.
Maybe the biggest reason that July wheat contract prices are projecting $4 plus wheat through '08 is that index funds are trading commodities. Some analysts contend that index funds trading commodities have resulted in nearly all commodity prices being higher than the supply and demand conditions require.
Corn used for ethanol production is expected to increase. This will result in higher corn prices and the by-product “distiller's grain” being used as feed. Both the higher corn price and the make up of distiller's grain may result in increase demand for wheat as feed.
Another interpretation of the fact that the KCBT July '08 contract price is about the same as the July '06 contract price is that wheat prices will be relatively flat. There is one thing that is known for certain “Wheat prices will not be flat! Wheat prices will be volatile!”
Using the average June basis of minus 34 cents for central Oklahoma or the Texas panhandle, the KCBT Jul ‘08 wheat contract price projects June ‘08 cash price of $4.24. Low production in ‘06, ‘07 and ‘08 could result in price being $7 or more.
Above average wheat production in ‘07 and ‘08 could result in prices being $3 or less. The question for you is “Do you want to price ‘07 and ‘08 wheat for about $4.25 or wait to see what the price is in ‘07 and ‘08?”