Since January 2, cash wheat prices have been in a 35-cent range between $4.50 and $4.85. At this writing, the price is about $ 4.78. The cash price was down about 14 cents yesterday and about seven cents higher today. Twice within the last three weeks, wheat prices have been about $4.85.
While a 35-cent cash price range seems excessive, with a price around $4.70, a 20-cent price decline ($4.70 to $4.50) is only a 4.5-percent price change, and the total 35-cent range is a nine-percent spread.
Since January 2, the KCBT March contract price has been between $4.70 and $5.05. The KCBT July wheat contract price has been between $4.75 and $5.10. The basis has increased about 10 cents per bushel.
Several things are happening in the wheat market. First, while the market news has mostly been negative, wheat prices remain in the sideways channel. Negative market news includes improved winter wheat production conditions and continued weak export demand.
The U.S. Drought Monitor released January 23 shows that, over the last month, the drought area in the hard red winter (HRW) wheat area significantly declined. The exceptional drought condition in north central Oklahoma has been downgraded two categories to severe, and most of the HRW wheat area is now free of drought conditions or is rated as moderate.
Reports from western Oklahoma, the Texas Panhandle, and western Kansas are that winter wheat looks the best it has in years. Even in areas where drought was a major concern, wheat conditions have improved and yield expectations have increased.
The USDA lowered projected 2006/07 U.S. wheat exports to 875 million bushels. This is down from 900 million bushels in December and one billion bushels in the 2005/06 marketing year. As of January 18, 507 million bushels had been shipped and 661 million bushels had been sold for export. To meet USDA's 875 million bushels export projection, weekly exports must average over 19 million bushels. Shipping 19 million bushels per week does not appear very likely.
The USDA projects that 265 million bushels of HRW wheat will be exported. This is down from 300 million bushels in November's estimate. To meet USDA's HRW wheat export projection, weekly shipments must average 6.5 million bushels. The USDA's HRW wheat export projection may be relatively close.
United States winter wheat production is expected to be 1.6 billion bushels compared to 1.3 billion bushels last year and a 5-year average of 1.4 billion bushels. If spring wheat production is the average 600 million bushels, total U.S. 2007 wheat production will be 2.2 billion bushels.
Under normal circumstances, wheat prices would be declining. But the current market situation is not normal. The second market change is the corn situation. Corn and specifically the potential for wheat to replace corn in feed rations may be supporting wheat prices.
Because wheat's feeding value is eight-percent higher than corn, wheat prices have little reason to go below local corn prices. Current costs for corn delivered to Oklahoma and the Texas Panhandle is about $4.50. Wheat prices and especially harvest prices are expected to remain at or above corn prices.
To project wheat prices, analysts must watch the corn situation. One analyst said, “If the corn price gets the flu, the wheat price will get pneumonia.”
A key USDA report will be the Prospective Plantings Report that will be released on March 30. The market will react to how many soybean and spring wheat acres are switched to corn.
Wheat and corn stocks are tight. If something happens to reduce either crop, prices will dramatically increase. About a 50-cents downside wheat price risk exists with at least a $1.50 upside potential.