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Wheat Prices Prompted By Dry Conditions

Driving through major winter-wheat-producing areas finds many fields being blistered by blowing dirt as dreadful dry weather lingers over much of the region. And it’s adding further fuel to higher prices already bumped by the recent grain supply-and-demand report.

 “Dry conditions in major wheat growing areas are providing strength to the wheat market,” says Mark Welch, Texas AgriLife Extension grain marketing economist. “July Kansas City Board of Trade (KCBT) wheat traded as high as $9.231⁄2 Friday and closed above $9 for the second straight day.”

In re-examining last week’s USDA supply-and-demand numbers, Welch notes that U.S. ending stocks were reduced by 40 million bushels due to an expected increase in export demand.  World grain stocks increased, as a revised estimate in beginning stocks, plus 0.75 million metric tons (mmt) offset a small decrease in production of 0.69 mmt and use declined 1.2 mmt. 

 “The corn, soybean and wheat futures markets responded to the USDA reports with higher prices that set new highs,” says Melvin Brees, University of Missouri Food & Agriculture Policy Research Institute (FAPRI) agricultural economist. “Besides tight carryovers – domestic and foreign demand is strong – there have been foreign production concerns and increased U.S. acreage with large production is needed in 2011.”

Asmeasured by days-of-use on hand at the end of the marketing year, Welch says the current estimate is a 98-day supply, up from 97 in December. In the USDA Grain Stocks report, U.S. wheat supplies remain adequate. All wheat in all positions is above 2009-2010 and the five-year average. The current projection for ending stocks of 818 million bushels is below 2009-2010 but still above average.

Last week’s Winter Wheat Seedings report showed a 3.6-million-acre increase in winter wheat sown last fall compared to 2010. Total winter wheat planted is estimated at 40.99 million acres, just below the 10-year average of 42.6 million. Kansas acres were up 400,000 and many soft wheat states showed increases, says Welch. Also, Missouri was up 380,000; Illinois, 410,000; Indiana, 180,000; Ohio, 150,000; and Michigan, 270,000.  “If we lose yield or acres in the west to dry conditions, total wheat output will be offset somewhat by increased acreage of higher yielding soft wheat,” says Welch.   

He points out that ahead of the S&D numbers, speculative investors pulled back in their net long positions. “Index funds were down about 48,000 contracts on the week and hedge funds were down about 11,000,” he says. “The price index was down just over 12 points.”

Following last week’s bullish S&D numbers, open interest in wheat, corn and soybean markets increased by over 200,000 contracts. “Hedge funds added to net long positions by over 50,000 contracts while index funds decreased net long holdings by about 17,000,” says Welch. “The grain price index rose to 861, the highest level since 892 on July 15, 2008. On that day corn was trading at $6.80, soybeans $16.30, soft wheat at $8.19 and KC wheat at $8.53.”    

Slow grower sales

Brees says that although most of the current information seems to be good news for wheat, corn and soybean prices, it’s not necessarily an easy situation for making selling decisions. “The initial reaction is probably to delay any additional sales of both old-crop and new-crop production,” says Brees. “This is not an unusual reaction, especially following last year’s price pattern that rewarded those who delayed sales until harvest or later.

 “A recent survey by a private market advisory service confirms that a large majority of producers continue to worry more about selling too much too early rather than waiting too long to make sales.  No one wants to make sales if prices are going higher, but the markets are volatile and full of uncertainty.

“There is risk of waiting too long. Remember, you also cannot delay sales forever. You have got to sell it sometime. A number of factors could eventually turn prices lower. Higher prices can be expected to slow use, which is usually followed by lower prices. Outside factors such as energy prices, dollar value, the economy and fund trading add to market volatility and could turn negative, sending prices lower. Favorable weather, improved foreign production and politics are among many other factors that could contribute to a market turnaround.”

So although dry weather persists over much of the Texas, Oklahoma and Kansas growing region, wheat can respond remarkably to late winter snow and rain and can explode when March rolls around. Will prices remain high? Many factors will likely keep the volatility intact through harvest and beyond.

 “With prices currently in an uptrend and pointed higher, you are likely reluctant to sell right now,” says Brees. “However, you should have a plan now. Current prices offer profit opportunities that are well above typical breakeven prices. You should not allow profitable prices to slip away. It is one thing to pass up a price on the way up, but don’t miss it on the way down.”

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