Wheat prices broke through the $4.63 KC March contract price support level, which signaled the end of the $4.63 to $5.00 sideways price pattern that had been established in mid-October.
To verify the continuation of the long-run price downtrend that was established in November 2012, KC March wheat contract prices need to close below $4.48. At this writing, the KC March contract price is $4.60. Oklahoma cash prices are mostly $3.80 in southern Oklahoma to $4.10 in northcentral Oklahoma. Texas panhandle prices range from $3.56 (Canyon area) to $4.15 (north of the Canadian River). The wheat basis has been relatively stable and is expected to remain near current levels.
The good news is that nearly every wheat supply and demand (market) factor is negative for prices. Prices have little reason to continue the downtrend.
Market price factors include U.S. and world wheat supplies, use, and planted acres and condition. Two additional market factors are the value of the U.S. dollar against other currencies and market fund investments in the wheat futures markets.
NEW RECORD PRODUCTION
World wheat production has established a new record in each of the last three years. World consumption has been above average, and set a new record during the 2014/15 marketing year. With world production greater than consumption, world wheat ending stocks increased from 5.8 billion bushels for the 2012/13 marketing year to a projected record 8.45 billion bushels for the 2015/16 marketing year.
During the 2013/14 through 2015/16 wheat marketing years, U.S. production and use were both average. U.S. ending stocks still increased from 718 million bushels to a projected 911 million bushels.
Note that record world wheat production trumped below average U.S. production. U.S. prices declined from a 2012/13 marketing year average of $7.77 to a projected 2015/16 marketing year average of $5.00.
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An important point is that for U.S. wheat prices to increase, 2016/17 world production must be less than world consumption. During the last five years, world consumption has averaged 25.7 billion bushels and the lowest year’s consumption was 25 billion bushels.
LOWER PRODUCTION NEEDED
These figures imply that for world wheat ending stocks to decline, world production needs to be less than 25.7 billion bushels — and maybe below 25 billion. World production during the 2015/16 wheat marketing year was 27 billion bushels.
For world wheat ending stocks to decline, world production needs to be at least 1.3 billion bushels, and probably 2.0 billion bushels less than the 2015/16 crop. World production had not reached 25 billion bushels until 2008, and was not above 25.7 billion until 2013.
Given that world wheat production is more important price-wise than U.S. wheat production, above average U.S. production could result in a $1.00 or so reduction in cash prices. A below average production could result in a $1.00 or so increase in prices.
If the index of the dollar value declined from 99 (current index) to 80 (average index), U.S. wheat prices could increase 80 cents or so. Given the strength of the U.S. economy relative to competing nations, this decline is unlikely.
As long as the world’s 2016 winter wheat crop is in dormancy and other competing grain prices are relatively low, Oklahoma and Texas wheat prices have little reason to increase. Poor growing conditions after wheat comes out of dormancy could result in “minor” price increases.
For U.S. wheat price to dramatically increase to $5.50 or higher, 2016/17 world marketing year production must be significantly below 25.7 billion bushels.