Three market factors have the potential to cause Oklahoma and Texas panhandle wheat prices to break $4 on the downside. One is the index of the U.S. dollar against other currencies, and the second is excess wheat stocks. Currently, both are negatively affecting wheat prices — and both could get worse.
U.S. agriculture pays a price to have a relatively strong economy. Since June 2014, the index of the U.S. dollar against major currencies has increased from 80.4 to 100.7. At this writing, the index is 99.4. When compared to other major currencies, the index of the U.S. dollar has increased 24 percent.
From June 2014 to November 2015, the euro’s index declined from 139 to 107, a 23 percent decrease. The Canadian dollar index declined from 94 to 75, a 20 percent decrease in value.
These changes imply that between June 2014 and November 2015, to stay competitive, the price of U.S. wheat on the world market had to decline 23 percent relative to the French wheat price and 20 percent relative to the Canadian wheat price.
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ANOTHER $1 LOSS POSSIBLE
The current Texas Gulf spot wheat price is $5.40. If the U.S. dollar index was 80, like it was in 2014, rather than 99 as it is now, the spot Gulf wheat price would be $6.70. A dollar index of 99, compared to a dollar index of 80, implies a $1.30 increase in the export price, or conversely, a $1.30 decline in the farm level wheat price.
At this writing, the wheat price in Central Oklahoma is $4.20, and the Perryton, Texas, price is $4. If the index of the U.S. dollar was 80, rather than 99, the price of wheat in Central Oklahoma would be $5.50, and in Perryton, Texas, it would be $5.30.
The index of the U.S. dollar peaked in July 2001 at 121.3. The index was above 110 between July 2000 and June 2002. The index was above 100 between November 1999 and August 2003.
It is possible, not likely, but possible, to lose another $1 in the price of wheat due to an increase in the value of the U.S. dollar.
Another market factor that has resulted in lower wheat prices is wheat stocks or supply. In June 2008, the monthly average wheat price in Oklahoma was $7.93. The U.S. wheat ending stocks for the 2007/08 marketing year were 306 million bushels and the June 2008 dollar index was near 73.
The December 2008 average monthly price was $4.61. The U.S. wheat ending stocks were projected to increase to 657 million bushels, and the dollar index had increased to 83. About $1.25 can be attributed to the dollar index and $2.07 to increased wheat stocks.
Monthly average Oklahoma wheat prices bottomed out in June 2010 at $3.75. The 2009/10 marketing year U.S. wheat ending stocks were 976 million bushels, and the dollar index was 84.
Another problem with Oklahoma and Texas wheat during the 2009/10 marketing year was milling quality. The basis in central Oklahoma got as low as minus $1.17. The average basis between June 2009 and October 2010 was minus 94 cents. This 40 to 50 cent below average basis reduced the price penny for penny.
Winter wheat is entering dormancy in relatively good condition. About 90 percent of the world’s 2015/16 wheat crop has been harvested. There is little chance that the prices will change much due to an unexpected reduction or addition to the remaining 10 percent.
March through June (size of U.S. winter wheat crop) is the critical time period when wheat prices could start the downtrend to $3.40. August through October is the second critical time period. We have about a 10 percent chance that the wheat price will reach $3.30.