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Higher production and higher prices

Higher production and higher prices

Oklahoma, Kansas, and Texas are not the only wheat production areas that have experienced higher production expectations due to timely rains

Since the rains began in April, Oklahoma and Texas 2015 harvest forward contract prices have increased about 70 cents per bushel (14 percent). During the same period, Oklahoma wheat production expectations have increased from about 80 million bushels to nearly 120 million bushels (50 percent). Production expectations have also increased in Texas and Kansas. You would expect higher Kansas, Oklahoma, and Texas production to have resulted in lower prices.

Oklahoma, Kansas, and Texas are not the only wheat production areas that have experienced higher production expectations due to timely rains. Reports indicate that production estimates have been increased for Algeria, France, Germany, Poland, and Ukraine. Lower production expectations have not been reported for other countries. Net world wheat production expectations are higher than 30 days ago.

Recent wheat price increases may have been because funds were holding a record 111,000 contracts short (555 million bushels sold) wheat futures contracts and bought 25,000 contracts (125 million bushels) to reduce the number of short positions.

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The May USDA/WASDE (World Agricultural Supply and Demand Estimates) report contained USDA’s first official 2015/16 wheat marketing year (June 1 through May 30) production and use estimates. World 2015/16 wheat production was projected to be 26.4 billion bushels compared to 26.7 billion bushels last year (down 1 percent).

World wheat ending stocks (total supply minus use) are projected to increase from 7.38 billion bushels to 7.47 billion (1.2 percent higher). The stocks-to-use ratio (ending stocks divided by use) is projected to be 28.7 percent compared to 28.4 percent last year and a five-year average of 27.9 percent. Above average ending stocks plus above average and higher stocks-to-use implies lower prices.

Identifying an “average” or “normal” price is difficult. The five-year average (using central Oklahoma prices) of $6.87, the 10-year average of $6.41, the 2014/15 marketing -year average of $5.69, or the November 1 to date average of $5.50 could be used.

Because 2015/16 world wheat production, ending stocks and the stocks-to-use ratio are projected to be nearly the same as during the period November 1, 2014, to the present using $5.50 as the average or normal price may be the best choice. The index of the U.S. dollar compared to other currencies was also above 90 during this period.

When evaluating wheat prices, another fact that must be considered is that 2015 U.S. hard red winter (HRW) wheat production is projected to be 853 million bushels compared to 738 million bushels last year. Hard red winter wheat stocks are also projected to be higher than for the 2014/15 marketing year.

The above analysis implies that the Oklahoma/Texas 2015/16 wheat marketing year average price is expected to be less than, but near $5.50. Also implied is a large possibility that fund selling resulted in wheat prices going lower than market conditions warrant.

In this case, fund buying wheat futures contracts trumps higher production expectations and higher projected ending stocks.

Additional information to consider is that the funds are still short 86,000 contracts (430 million bushels). When the funds offset the shorts, wheat prices may increase more than supply and demand conditions warrant. This situation could provide an opportunity to sell at relatively high prices. Note: “relatively high” is relative to $5.50, which is often thought of as “relatively low.”

Over the last five years, U.S. wheat production has only been about 8 percent of world wheat production. Russia, Ukraine, and Kazakhstan wheat exports have reduced the demand for U.S. HRW wheat in the world market.

Oklahoma and Texas wheat production has a limited (small) impact on wheat prices. When our production expectations increase and prices increase too, this is a good thing.

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