During October at an elevator in central Oklahoma, the average cash price was $5.01 and the price range was between $4.74 and $5.20. The current cash price is $4.99 and the local basis is a minus 25 cents off KBCT December. The five-year average October average basis is a minus 23 cents and the November five-year average basis is a minus 20 cents.
The KCBT December ’06 wheat contract is trading in a 40-cent price range between $5.10 and $5.50. There is a 10-cent “no-man’s-land” between $5 and $5.10, and then a potential range from $4.60 to $5. The odds of falling to the $4.60 to $5 range are relatively small. Normally, KCBT wheat contracts trade in a 20 to 25 cent price range.
There is a lot of uncertainty in the grain marketing system. The introduction of converting corn to ethanol and tight U.S. and world wheat stocks have resulted in market uncertainty and price volatility.
Since the 2004/’05 corn marketing-year, corn used for ethanol production has increased from 1.3 billion bushels to an estimated 2.2 billion bushels. Even with the third highest corn crop, 10.9 billion bushels, 2006/07 marketing year corn ending stocks are projected to decline from nearly two billion bushels to below one billion bushels.
Where will the corn be produced to meet 2007/’08 marketing year demand? Even if corn required for ethanol does not increase, and it will, there is not a spare billion bushels of corn to meet 2007/’08 requirement. Thus, corn must bid land into production. Some analysts predict that it will take an additional 5 million acres of corn.
This land will most likely come from soybeans but some may come from wheat. Wheat prices must remain relatively high to keep wheat land from going to corn. The market has not figured out the wheat price impact from the increased demand for corn.
Add relatively tight U.S. and world wheat stocks, declining production expectations in Australia, and to a limited degree, drought conditions in the hard red winter wheat production area to the corn situation and you create volatile wheat prices. United States wheat ending stocks are projected to be the lowest since the 1995/’96 marketing year’s 376 million bushels.
World wheat ending stocks are projected to be 4.4 billion bushels, the lowest since the 1981/’82 marketing year. The world’s wheat stocks to use ratio, ending stocks divided by use, is projected to be 19.5 percent. This is the lowest percentage on record. A 19.5 percent stocks to use ratio implies that at the end of the marketing year, there will be 71 days of wheat in storage.
In late October, the Australian Wheat Board lowered Australia’s predicted 2006 wheat production to 331 million bushels. This was down from USDA’s 404 million bushel prediction released Oct. 12. Australia’s wheat production in 2005 was 900 million bushels and the five-year average is 791 million bushels.
During the 2006/07 wheat marketing year, the USDA projects Australian domestic wheat consumption to be 235 million bushels and exports to be 425 million bushels for a total use of 660 million bushels. Australia’s ending stocks are projected to be 90 million bushels compared to a 5-year average of 242 million bushels. This is based on USDA’s 404 million bushel production. Lowering production to 331 million bushels will result in lower exports.
Drought conditions persist over much of the HRW wheat area and add uncertainty to the 2007/08 wheat prices. Currently the KCBT July wheat contract is trading in a price range between $4.70 and $4.90. The fund traders may push prices about 10 cents above and below this range.
Some elevators are offering 2007 harvest contracts for 40 cents less than the KCBT July ’07 wheat contract price. Below-average U.S. winter wheat production will result in prices being well above the current price and an above-average production will result in prices being below the current price. There is probably more upside price potential than downside price risk. But with changes in the grain markets, who knows?