Wheat stocks are relatively tight, and a tremendous amount of price variability is present in the market.
Four words: funds, crop condition, and Ukraine, may be used to explain the recent $1 wheat price increase. The message may not be that wheat prices are $1 higher than 30 days ago. The message may be that wheat stocks are relatively tight, and a tremendous amount of price variability is present in the market.
The single most important market factor is that U.S. hard red winter (HRW) ending wheat stocks (stocks on May 31, 2014) are projected to be about 180 million bushels, which is 44 percent below average. The five-year average HRW wheat ending stocks are 322 million bushels.
All U.S. wheat ending stocks are projected to be about 560 million bushels compared to 718 million bushels last year and a five-year average of 771 million bushels. This projection is 28 percent below average.
World wheat ending stocks are projected to be about 6.75 billion bushels, only 3.5 percent below the five-year average. In the world market, sufficient quantities of wheat are available. What is in short supply is good bread-milling wheat. That wheat is what HRW wheat farmers produce and what the world needs.
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Given tight U.S. wheat supplies, the major reason for the $1 wheat price increase may have been the funds buying wheat, corn and soybean futures contracts. If the funds reverse their futures contract positions, wheat prices should decline.
Fund traders normally have a sound reason for buying and/or selling. The reason behind recent purchases may have been because 25 percent of Oklahoma’s, 22 percent of Kansas’s, and 46 percent of Texas’s wheat crops are rated poor to very poor. These numbers are down from Oklahoma’s 5 percent, Kansas’ 4 percent, and Texas’ 28 percent poor to very poor on November 25, 2013.
Relatively poor wheat crop conditions only increase the odds that 2014 HRW wheat production will be below average. History indicates that HRW wheat production is determined by weather in March, April, and May. Current conditions are only a small indication of future production.
HRW wheat planted acres are 2 percent higher than last year’s planted acres. Kansas acres are down 6 percent, Oklahoma acres are 5 percent lower, and Texas planted acres are equal to last year. Montana planted 25 percent more acres, and Colorado planted 26 percent more acres.
The Ukraine’s impact on wheat prices may have been relatively small. Reports indicate that Ukraine’s wheat export shipments have not been interrupted. Reports are that Ukrainian producers may be holding wheat as a hedge against the potential decline of the value of Ukraine’s currency.
Logic would indicate that Ukrainian, like U.S. winter wheat producers, have sold most of their wheat to prepare for the upcoming wheat harvest.
Logic would also indicate that the most import price factors are tight U.S. wheat stocks and the March, April, and May weather. We know stocks are tight. We do not know what the weather will be.
At this writing, wheat may be forward contracted for harvest delivery for about 40 cents less than the KC July wheat contract price or about $6.75.
In early February, the KC July wheat contract price was $6, and the wheat forward contract price was $5.60. Take away the fund buying and the relatively poor crop conditions, and wheat prices will be back to this level.
The four words: funds, crop conditions, and Ukraine can reverse the price impact quickly. The question producers need to ask is: Which will hurt me worse, not forward contracting wheat for $6.75 and having to sell it for $5.60 or forward contracting wheat for $6.75 and not having the opportunity to sell for $7.25?