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Lower stocks and lower prices, go figure

Lower stocks and lower prices, go figure

Lower production and lower stocks has to be positive for wheat prices. Less wheat will be fed. This may be the year to sell wheat in one-third increments.

In the USDA June World Agricultural Supply and Demand Estimates (WASDE) reports, 2012/13 wheat marketing year wheat production was lowered for both the U.S. and the world. Ending stocks and the stocks-to-use ratios were also lowered. The initial market reaction was lower Kansas City Board of Trade (KCBT) and the Chicago Board of Trade (CBT) July wheat contract prices.

Even though the initial price reaction was for lower prices, lower production and lower stocks has to be positive for wheat prices. The result should be that wheat prices bottom out at a higher price and/or, later in the year, peak at a higher price.

U.S. wheat production was only lowered 11 million bushels to 2.234 billion bushels. The USDA estimated winter wheat production to be 1.684 billion bushels, which was 10 million bushels lower than the May estimate and 34 million bushels higher than the trade expected.

World wheat production was projected to be 24.7 billion bushels compared to 24.9 billion bushels in May and 25.5 billion bushels in the 2011/12 wheat marketing year.

Both the U.S. and world wheat stocks-to-use ratio (ending stocks divided by annual use) were lowered. The U.S. 2012/13 stocks-to-use ratio estimate was 29.1 percent compared to 30.7 percent last month and 32.3 percent for 2011/12. The world stocks-to-use ratio was lowered to 27.2 percent compared to 28.1 percent for 2011/12. The five year average stocks-to-use ratios are 32.1 percent for the U.S. and 27.1 percent for the world.

Outside forces may be having a larger price impact than changes in the wheat supply and demand situation. Chicago Board of Trade corn contract prices are now below CBT and KCBT wheat prices. This implies that less wheat will be fed. Reports indicate that some major feed mills and livestock feeders have already switched from wheat to corn.

Continued economic turmoil in the European Union and the devaluation of the Euro plus the increased value of the U.S. dollar relative to other major currencies continue to increase the price of U.S. wheat on the world market.

Another factor is wheat harvest selling. As wheat harvest progresses north, producers sell wheat, which has and should continue to have a negative price impact.

The odds are that wheat prices will continue to decline between now and late July or early August. Normally, wheat prices increase between late July and December. This year appears to be following this pattern.

Prices to watch relative to the KCBT July wheat contract are $6.33 and $6.10. If the July contract price breaks $6.33, the next price target should be $6.10. Prices below $6.10 (At the present time I do not expect prices to go below $6.10) imply a July contract price target of $5.76.

If U.S. and/or foreign wheat harvest or corn production expectations decline, wheat price could increase. If the July wheat contract price goes above $6.80, an uptrend could be established. In this case, the July contract target price would be about $7.20.

Since the Oklahoma and Texas cash price is about $6.20, this may be the year to sell wheat in one-third increments. Consider selling one-third now, one-third in late September or early October, and the final third in November or December.

Ifyou can’t afford to sell wheat for $5.50 or less, consider selling a higher percentage now.

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