June 4, 2007
It cost about 5 cents per bushel per month to store wheat in commercial storage — about 3 cents of that is for storage, and interest cost is about2 cents. To store wheat from July 1 to December 1 costs about 25 cents.
At this writing, the KCBT Dec wheat contract price is 24 cents higher than the KCBT July wheat contract. The market is signaling that there is a 50/50 chance that storing wheat will produce a net price equal to or better than the price received at harvest.
If storage cost is less than 3 cents and/or interest is less than 2 cents per bushel per month, the odds of storage producing a profit increases.
There is a tremendous amount of uncertainty and risk in the market. If something happens so the U.S. wheat and/or corn and/or the foreign wheat crops are below current expectations, prices will increase dramatically. There is about 40 cents downside price risk and a possible $1 upside potential in the market.
Oil prices influence fuel prices, which influence corn prices, which influence wheat prices. The end of a whip tends to move farther and faster than any other part of the whip. Wheat prices are at the end of the price whip.
Other factors impacting wheat prices and the potential for storage profit are hard red winter wheat production, winter wheat production, total U.S. wheat production, U.S. corn production, and world wheat production. The market must evaluate a lot of information to determine the price of wheat.
Wheat and corn stocks are tight and are projected to remain tight through May, 2008. United States 2006/07 marketing year wheat ending stocks are projected to be 412 million bushels, the lowest since 1995/96, and 2007/08 wheat marketing year ending stocks are projected to be 469 million bushels.
World wheat ending stocks are projected to be 4.4 billion bushels in 2006/07 and 4.2 billion bushels in 2007/08. These are the lowest ending stocks since the 1981/82 marketing year. For the 2007/08 marketing year, the world’s wheat stocks-to-use ratio is projected to be 18.7 percent, which breaks the record set at the end of the 2006/07 marketing year.
Corn demand for ethanol production is projected to increase from 2.15 billion bushels to 3.4 billion bushels. Corn production is projected to be 12.46 billion bushels compared to projected demand of 12.47 billion bushels. 2007/08 marketing year ending stocks are projected to remain at about 940 billion bushels.
The record corn production was 2004’s 11.8 billion bushels from a yield of 160.4 bushels per acre, 80.9 million planted acres and 73.6 million acres harvested.
2007’s projected 12.5 billion bushel crop is based on 92.5 million planted acres, 82.9 million acres harvested acres and an average yield of 150.3 bushels per acre.
The 2007/08 market situation is one of record or near record corn and wheat production and relatively high prices. A 12.5 billion bushel corn crop beats the 2004 record by about 650 million bushels. The world’s projected 22.57 billion bushel wheat crop is second largest to the 2005/06 marketing year crop of 22.85 billion bushels.
Even with relatively high production, consumption is projected to match or exceed production, which implies that prices should remain relatively high.
There is a chance that production will be higher than expected. If this happens, the net wheat price in November will be less than the price received during the wheat harvest.
Continued tight wheat and corn stocks imply that prices will remain near current levels and volatile. A prudent method to market wheat is to establish a simple marketing strategy and follow it — and do not try to outguess market prices.
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