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Winter wheat prices could soften

Motorists traveling the highways and by-ways of the Mid-South and Southeast states are seeing a lot more green in farmers’ fields this fall.

With Chicago soft red winter futures trading close to $5 a bushel and relatively dry conditions allowing them to get in their fields and plant, growers are believed to have significantly increased their winter wheat plantings.

But farmers shouldn’t let those shiny, green fields — and currently high futures prices — distract them from making good pricing decisions for marketing that wheat when it comes out of fields next May or June.

All those fields of green and decent growing conditions could mean the current supply/demand situation for wheat — the primary reason for those high futures prices — could be radically altered by harvest, according to a speaker at the Southern Region Agricultural Outlook Conference in Atlanta.

“Informa Economics is forecasting about a 4.6-million-acre increase in total wheat plantings for 2006-07,” says Kurt Guidry, an agricultural economist with the Louisiana State University AgCenter. (Informa Economics is a Memphis, Tenn.-based agricultural and commodity research, analysis and consulting firm.)

“I don’t think we have enough demand to take in another 4.6 million acres of wheat,” he said.

Futures prices for wheat, corn and soybeans have been rising in recent weeks as the grain markets have become caught up in “ethanol” fever. USDA is estimating up to 20 percent of the 2006 U.S. corn crop could go to ethanol production.

When Guidry spoke at the Southern Region Outlook Conference in Atlanta in late September, Chicago December 2006 soft red winter wheat futures were trading at $4.19 per bushel and Kansas City December 2006 hard red winter wheat futures at $4.81. At press time, the Chicago contract was $4.92 per bushel and the Kansas City was $5.24.

While wheat futures have been supported by the ethanol-driven activity in corn, low supplies have also helped push prices higher, says Guidry. U.S. wheat supplies have dropped nearly 10 percent from the 2005-06 marketing year and world supplies have also been trending down.

“The current wheat prices are relatively strong compared to historical prices,” he said, noting the upturn has been due primarily to drought in the United States and other countries, including Australia and the Ukraine. “We have lower supplies, but we also have lower demand.”

The London-based International Grains Council recently said 2006-07 world wheat production would total 588 million metric tons, down 30 million metric tons from the 2005-06 marketing year and 19 million metric tons from expected 2006-07 world demand of 607 million metric tons.

A portion of the shortfall is expected to come from Australia, where farmers could harvest 12 million to 15 million metric tons of wheat compared to the 25 million metric tons last year. Countries such as the Ukraine are also expected to have smaller crops due to water shortages.

Drought conditions in the western United States have also hammered wheat farmers. Analysts say the U.S. wheat yield average could drop to 38.3 bushels per acre from last year’s 42-bushel average. The 2006-07 U.S. wheat harvest, as a result, is likely to fall to 1.8 billion bushels from last year’s 2.1 billion.

“U.S. ending stocks are forecast to reach 429 million bushels, one of the lowest levels in 25 years,” said Guidry. “The problem is there’s nothing on the demand side to push prices up.”

Domestic food use is expected to change little at 920 million bushels in 2006-07, he said. Seed use is forecast at 80 million bushels, up 2 million bushels from 2005-06 and down 1 million from the five-year average. Feed use could decline 12 million bushels to 145 million in the 2006-07 marketing year.

Exports also appear to be stuck on a down trend since reaching a high of nearly 1.2 billion bushels in 2003-04 and could fall another 100 million bushels or more to 900 million bushels in 2006-07, despite the reduction in world wheat stocks.

The picture is even less glowing for soft red winter wheat, the type grown in the Mid-South and Southeast states. (The Plains states — Kansas, Oklahoma, Texas and Colorado — produce mostly hard red winter wheat while the upper Midwestern states focus on hard red spring wheat.)

“We’re seeing increases in ending stocks (from 106 million bushels in 2005-06 to 112 million bushels in 2006-07),” says Guidry. “Domestic use and exports have also been increasing and pushing the stocks-to-use ratio lower, but the strengthening of demand needed is still not there.

Fundamentals for hard red winter wheat are more promising. USDA is forecasting ending stocks could drop from 2005-06’s 212 million bushels to 120 million, reducing the stocks-to-use ratio from 23.27 percent to 15.94 percent.

Most farmers are aware of the weak basis levels that meant lower cash prices for farmers along the Mississippi River. While Chicago soft red winter wheat futures were trading at relatively high levels, cash prices at Mississippi River terminal elevators were 80 cents to 90 cents per bushel under Chicago during the harvest.

“There was simply not enough demand for soft red winter wheat to bring the cash prices up,” said Guidry. “And we have continued to have problems with water levels in the Mississippi River and with barge rates running at 121 percent of the three-year average in that region.”

Looking at long-term price trends, analysts could make a good case that hard red winter prices will remain relatively high while soft red winter prices could, well, soften. Over the period from 1967 to 2005, wheat prices have averaged $3.68 per bushels when the stocks-to-use ratio has ranged from 16 percent to 20 percent.

When the stocks-to-use ratio has risen to the 26 percent to 30 percent range, wheat prices have averaged $2.97 per bushel, according to Guidry.

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