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SWFP-SHELLEY-HUGULEY-wheat-harvest-evans-19-180101.jpg Shelley E. Huguley

2020 wheat forward contract basis fair, price may be low

Figures imply the world has 36 percent more wheat than what is projected to be used.

Wheat may be forward contracted for June 2020 delivery for $4.00 per bushel in both Burlington and Perryton. The harvest forward contract price is based on the Kansas City July 2020 wheat contract price of $4.40 and a minus 40 cent basis.

For harvested wheat delivered and sold during June over the last five-years, the basis has averaged minus 33 cents for Burlington and minus 29 cents for Perryton. For harvested wheat delivered and sold during July, the five-year average basis has been minus 40 cents for Burlington and minus 36 cents for Perryton. This implies that 40 cents may be a “fair” basis for harvest delivered wheat.

Forward contract prices are based on expected changes in supply and demand between now and the 2020 harvest (Table 1). Two numbers that may be the best price predictors are wheat ending stocks and the stocks-to-use ratio. The stocks-to-use ratio is determined by dividing ending stocks by annual use.

SWFP 100319_Kims chart.jpg

What Table 1 does not show is world production (28.128 billion bushels) is a new record. United States all wheat production is near the five-year average. United States Hard Red Winter (HRW) wheat production is 27 million bushels above average. And, Black Sea (Russia, Ukraine, and Kazakhstan) wheat production is slightly above average.

World wheat ending stocks are projected to be a record 10.5 billion bushels with a stocks-to-use ratio of 36 percent. These figures imply that the world has 36 percent more wheat than is projected to be used. The five-year average stocks-to-use ratio is 32 percent.

The U.S., with a stocks-to-use ratio of 47 percent, has a larger excess than the world. Before one bushel of U.S. wheat is harvested in 2020, one-half of the wheat needed for the 2020/21 wheat marketing year will already be in the bin. The same conclusion may be applied to U.S. HRW wheat.

See, COTTON SPIN: Continued bearish outlook for old cotton crop

The story is different for Black Sea exporters. With 4.15 billion bushels of production, Black Sea exporters’ ending stocks are projected to be 369 million bushels with a stocks-to-use ratio of 9 percent.

The good news for the rest of the wheat world is that the Black Sea exporters (they control almost one-third of the world’s wheat exports) will essentially be out of wheat at the beginning of the 2020 wheat marketing year. Any problems with Black Sea wheat plantings this fall, extreme cold weather this winter, or anything else that may lower Black Sea exporters’ 2020 wheat production should result in significantly higher world and U.S. wheat prices.

At this writing, the market is offering $4.40 for 2020 harvested wheat. The price difference between 11 percent protein HRW wheat and 12.6 percent protein HRW wheat is 67 cents. If this protein premium holds, the price for 12.6 percent protein 2020 harvested wheat may be closer to $5.00 than $4.40. Unless specified in the forward contract, a protein premium will probably not be paid for forward contracted wheat.

See, Markets Focused on Horizon

History shows that the minus 40 cent basis may be fair to both the producer and the grain merchandiser. But, the forward contract price may be too low if the harvested wheat is relatively high in protein.  

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