“There is an 80 percent chance that wheat prices have peaked for the 2006/07 wheat marketing year,” was the first sentence of the June 6 Wheat Scoops article. I received an e-mail from a “Texas wheat farmer” which said, “You are right just about as much as the weathermen in Texas.” My reply: “Did you take advantage of the price this time? And you probably have really good weathermen in Texas.”
The following is a recap of wheat price movements since May 22 and a prediction of what to expect wheat prices to do between now and Dec 1. It is important to note what proportion of wheat price changes were due to futures contract price changes and what proportion was due to basis changes.
On May 22, central Oklahoma and Texas Panhandle wheat prices were about $4.88. By June 19, prices had declined 55 cents to $4.33. Prices recovered to $4.96 by July 11 and then fell to $4.58 by July 19.
The 55-cent price decline from May 22 to June 19 was due to a 1-cent decline in the basis and a 54-cent decline in the KCBT September wheat futures contract price. The 63-cent price increase from June 19 to July 11 was due to an 8-cent basis increase and a 55-cent increase in the KCBT September wheat futures contract.
The recent 38-cent price decline was due to the KCBT September contract falling 38 cents. The July/September contract basis held steady at a minus 29 cents. During the price declines, the KCBT September contract remained in a long-run uptrend. Unless the KCBT September contract breaks the $4.80 price level, the uptrend will continue.
Critical KCBT September contract price levels are $4.80, $5 and $5.25. On July 18, the Septeber contract closed at $4.90¼. The September contract bottomed at $4.77 and closed at $4.87 on July 19, which tested the $4.80 support level. The September wheat contract was up 15 cents and above $5 on July 20. It takes two consecutive closes below $4.80 to establish a downtrend.
There are two positive factors in these price movements. First is that the basis improved 8 cents (went from minus37 cents to minus 29 cents). During the last five years, the July average monthly basis for the September contract was a minus 29 cents and the July/September contract basis averaged a minus 25 cents last year. An 8-cent basis gain and a minus 29-cent basis indicate that demand remains relatively strong.
Second is that during the price declines, the KCBT September and December contract prices remained above the long-run uptrend line. This implies that Oklahoma and Texas Panhandle wheat prices should remain above $4.50.
United States spring wheat and foreign wheat production (weather) will determine whether wheat prices continue the uptrend or establish a downtrend. The U.S. marketing year wheat price tend is normally set in late August and early September. This is when the market gets a handle on the size of the foreign wheat crop.
Current projections are for the U.S. spring wheat crop to be 526 million bushels. United States wheat-ending stocks are projected to be 438 million bushels compared to a five-year average of 580 million bushels.
World wheat production is projected to be 22.2 billion bushels. World wheat consumption is projected to be 22.7 billion bushels and world wheat-ending stocks are projected to decline to 4.9 billion bushels. The five-year average is 5.6 billion bushels.
Both world and U.S. wheat stocks are tight. It does not take much reduction in expected production to cause wheat prices to increase. Right now, it appears that the market is not willing to bet on higher than expected production (lower prices) or lower than expected production (higher prices). However, the trend is up and normally, “the trend is your friend.”