Folks who pay attention to the wheat market could find several reasons why prices could be a bit higher than they are now.

Typically, markets improve at this time of the year, says Texas AgriLife Extension marketing specialist Stan Bevers. “The current downturn is abnormal,” he said during the recent Red River Crops Conference in Altus, Okla. “Typically, the wheat market is moving higher at this time of year.”

He says it will be important for wheat to stay above $6 a bushel. Otherwise, we could see a cash price move to the low $5 range.”

Another factor supporting or suggesting that prices could be higher is that winter wheat planted acreage is down 3 percent. “So, could wheat price go higher? The wheat crop also does not look good right now,” he added.

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Much of the winter wheat production area lies within a region still suffering from long-term drought. “What’s our production outlook?” Bevers asked. “I have no clue. We can still make a pretty good crop, if we get rain. Some areas never came out of drought.” Lingering drought could suggest a price uptick, he said. “But a good rain would solve that, and then a move up would not be justified. If drought persists through the end of April, markets could move up. But if the drought continues, growers have no wheat to sell.”

He said some observers are concerned about winter kill in the Central Plains.

Production and consumption affect the markets, Bevers said, and last year world’s production was higher than consumption, increasing stocks. Even that aspect has caveats, however. “The world has plenty of wheat but not plenty of quality wheat. The United States has quality wheat, hard wheat.”

Multiple factors affect wheat offerings.

U.S. production last year was 2.1 billion bushels. Carryover will not be known until May, but typical carryover is 643 million bushels. Domestic use takes from 1 billion to 1.5 billion bushels, “about half of total production, Bevers said. “Export totals are variable, 1 billion bushels, plus or minus a bit. Typically, we export about half our production and without exports we would have no market for about half our crop and prices would tumble. Currently, exports are holding up.”

Ending stock for U.S. wheat the last ten years has averaged 643 million bushels. Currently, carryover is 608 million bushels. “So, should wheat prices be a little higher?”

Bevers characterizes current offerings as “mediocre. It’s not $8 but it’s not $4 either.”

Still, demand is in a tight spot with a ten-year average world supply at 6 billion bushels. “We now have 6.8 billion bushels, so an upward price move may not be justified.”

No support from corn

Corn is also no longer supporting the wheat market as has been the case for the last 18 months. Bevers said when corn hits something like $7 a bushel, the cattle industry looks for alternatives and that’s been wheat. U.S. corn production last year topped almost 14 billion bushels, up from a typical 10 billion- to 12 billion- bushel harvest. “We need all of it,” Bevers said. Ethanol, along with the livestock feed demand and a small amount for export, burns through a lot of corn. “We need from 13 billion to 14 billion bushels.”

He said when production fell to 10 billion bushels in 2012 the livestock industry needed an alternative. Wheat filled some of the shortage and price went up. Typical ending stocks for corn—ten year average—is 1.5 billion bushels. “We’re slightly above that,” Bevers said.

He said wheat marketing options may be limited but an insurance price of $7.02 a bushel offers some protection. “We don’t really like to market to insurance but with the current situation, it’s a reasonable option.”

He said producers who are grazing cattle on wheat might want to consider leaving the cattle on as long as possible and capitalize on the potential daily weight gains and high cattle prices. “If you plan to harvest, you have to get cattle off by midnight, March 15,” he said.

Other marketing options include futures contracts. “But that comes with production risks.” He said put options establish a floor under wheat prices, “but you pay for leaving the option open. Now, the floor would be $5.25. A forward contract plus a call option is another possibility and producers could lock in $5.40, but with a production risk.”

Producers can also hold wheat and sell at harvest, he said.

At current prices, wheat producers should cover variable costs, which Bevers figures at $5.19 a bushel, considering a 26 bushel per acre yield. “You can get that now.”

Adding fixed costs to the equation adds another $53 to the total and moves breakeven to $7.23, which is not available and not expected to be. Kansas City price at time of Bevers’ presentation was $6.13 with a cash price of $5.50.

Corn farmers could have a tough time as well as cost of production has not declined to match lower corn prices. “When we see a big run up in crop prices, production cost rises to meet it. When prices come down, production costs also come down to meet it.” The problem is that cost declines lag two to three years behind price drops. “Production expenses are still high.”

He said a significant number of Midwest acres are moving out of corn and into soybeans. “And in the Southeast, there has been no drought so acreage is switching to cotton.”
Bevers said livestock producer who have cattle, “are in the driver’s seat. If you want to buy, it’s expensive.”

Beef production, Bevers said, will be substantially lower in 2014 and “even less in 2015. Boxed beef price (at time of the presentation) was $240. Ground beef was $5 to $6 a pound.” Consumers are paying more for ground beef than they are for gasoline.”

The question, he said, is can consumers substitute. They have little choice with gasoline, “except walking. But there is a top on beef prices because consumers have chicken, fish, pork and beans.”

Producers also have options, he said, and the smart ones will pay close attention to cost of production and the marketing alternatives available that will give them a chance to make a profit.

Also of interest:

Wheat crop promising, corn planting on horizon

Good news for wheat prices

Wheat Outlook: Jekyll trumps Hyde