WHEAT SCOOPS: What’s out there to change wheat prices?

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One thing we know is that something will happen to break the price out of the current trading range but when?

Since October 1, the Medford, Okla., wheat price range has been $7.66 ± 81cents ($6.85 to $8.47).  At the present time, there doesn’t appear to be information in the market to change this price range before the 2022 Oklahoma/Texas wheat harvest.

One thing we know is that something will happen to break the price out of the current trading range. The question is when? The starting point to answer this question may be the information in the USDA reports released January 12, 2022.

At this writing, the Medford, Okla., cash wheat price is $7.28 (-32 cents KEWH), and the forward contract 2022 harvest price is $7.38 (-27 cents KEWN) (Note: KEW is the Chicago Board of Trade Hard Red Winter Wheat (HRW) contract: H is March contract and N is the July contract.)

 The Perryton, Texas, wheat cash price is $7.63 (+3 cents KEH), and the 2022 wheat harvest forward contract price is $7.27 (-38 cents KEH). Note the abnormally high Perryton current cash price basis (+3 cents compared to -38 cents for harvest). This basis creates a dilemma for Texas and Oklahoma Panhandle wheat producers. Will the “strong” basis continue into harvest? The difference between the Perryton current basis and the forward contract basis is 41 cents. The question may be: Will the wheat for feed demand continue into the 2022 wheat harvest? 

On January 12, 2022, the USDA released the January WASDE (World Agricultural Supply and Demand Estimates), the Winter Wheat Seedings, and the Quarterly Stocks reports. These reports weren’t supportive of wheat prices.

The WASDE stocks-to-use ratio (ending stocks divided by annual use) both summarizes the supply and demand information and adjusts the information for trends across years. Both world and U.S. wheat stocks-to-use ratios impact Oklahoma and Texas wheat prices.

 The world’s stock-to-use ratio is significantly less variable than the U.S. ratio, which implies that smaller changes in the world’s ratio has a bigger price impact than equal changes in the U.S. ratio.

In the January WASDE, the 2021/22 wheat marketing year world’s wheat stocks-to-use ratio was estimated to be 35.6% compared to the 2019/20 marketing year ratio of 39.6%. The lower ratio supports higher wheat prices.

Figure 1 shows the relationship between Oklahoma average annual wheat prices (green line) and U.S. HRW wheat stocks-to-use ratios (red line). The inverse relationship between price and the stocks-to-use ratio is clearly shown.

Looking closely at prices and the stocks-to-use ratios shows that prices tend to lead ratios. This phenomenon may be because Oklahoma and Texas wheat producers tend to sell wheat early in the marketing year; thus, the ratio is mostly determined after wheat has been sold. This implies that the 2021/22 marketing year ratio is expected to have more impact on Oklahoma and Texas 2022 wheat harvest prices than the projected 2022/23 ratio.

The 2021/22 U.S. HRW stocks-to-use ratio is projected to be 35%, and Medford wheat may be forward contracted for $7.40 (January 13). As the 2021/22 stocks-to-use ratio projections change between now and harvest, prices will change accordingly.

Between now and harvest, about the only thing that will change the 2021/22 stocks-to-use ratio is exports, and only minor changes in exports are expected.

The Oklahoma and Texas 2022 wheat harvest prices will also be impacted by the size of the 2022 HRW wheat crop. The 23.8 million HRW wheat planted acres are 1% higher than last year. Weather will determine the size of the crop.

What’s out there that could cause the wheat price to change? Weather. However, the major price factor is the relatively low stock-to-use ratio, and it supports relatively high prices.

Figure 1. Oklahoma Average Annual Wheat Price and U.S. Hard Red Winter Wheat

                  Stocks-to-Use ratio: 2001 through 2021.

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Source: USDA Economic Research Service.

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