The KC July ’18 wheat contract price increased nearly 50 cents in five trading days and touched $5.00. With a minus 70 cent basis, wheat could be forward contracted for June 2018 delivery for $4.30.

While the rally is exciting, the $4.30 price is still below the variable cost of production for most producers.  

Massive wheat stocks are in the bin, but the milling quality of much of it is questionable. Managed money funds are reported to be short 150,000 CBT wheat contracts (750 million bushels soft red winter wheat) and short 18,000 KC contracts (90 million bushels hard red winter wheat).

U.S. hard red winter (HRW) wheat exports are 11 percent less than last year. Russian exports are 35 percent above last year. All these factors are contributing to wheat prices below $4.00.

 CROP IS SUFFERING

The market recognizes that it is dry, and the HRW that will be harvested in June is suffering. If the 2018 HRW crop is short on quantity and/or quality, domestic millers may have a very difficult time finding milling quality wheat. If the shortage continues or worsens, U.S. HRW prices may dramatically increase.

An alternative to using Oklahoma, Texas, and Kansas HRW for flour is to import 12.5 protein, 59 pound test weight wheat from Russia. Russian bread flour milling quality wheat may be originated FOB (free on board vessel) for $194 ($5.28 per bushel) per tonne (metric tonne=2,205 pounds or 36.74 bushels).

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Ocean freight is somewhere around $26 per tonne (71 cents). Russian wheat could be shipped into Houston, Texas for about $6 per bushel. Unloading, handling, and shipping fees would put Russian wheat at about $6.75 at a Fort Worth, Texas, flour mill.

 LITTLE REASON TO SELL

What this scenario may imply is that if it does not rain, and the 2018 HRW wheat crop is well below average, cash wheat prices could increase to $6.75 or higher.

It also implies that producers have little reason to sell 2018 harvested wheat before harvest. If it does not rain and yields are relatively low, wheat prices will increase. In that case, producers would not want to have wheat priced at $4.30.

Also, if yields continue to decline, the managed funds will need to buy KC and CBT wheat contracts to offset their short positions. This alone could cause slightly higher wheat prices.

If it rains and yields are above average, but the test weight is 59 pounds or higher and protein is 12 percent or higher, cash wheat prices could still be $4.30 or higher. The market needs protein and quality bread flour milling wheat.

The latest Milling and Baking News KC protein report shows that KC protein premiums are 90 cents for ordinary (less than 11 percent protein) wheat, $1.20 for 11 percent protein, $1.60 for 11.5 percent protein, and $1.90 for 12 percent protein. The base market price quote is for ordinary. The premium above ordinary would be 40 cents for 11 protein, 70 cents for 11.5 percent protein, and $1 for 12 percent protein.

If the Oklahoma and Texas 2018 wheat harvest has quality protein and good test weight, the protein premium may be built into the local elevator cash price. Built in, or published as a cash price plus a premium, the market may be offering $4.30 or more for wheat delivered in June 2018. 

This rally is probably real. Rain may cause prices to fall in the short run. But with a quality wheat harvest, the odds are that prices will return to $4.30 — and may be even higher.