On June 20, 2013, the Central Oklahoma and Texas Panhandle wheat price is expected to be $7.25 per bushel.
An optimistic expected price is $9, and a pessimistic expected price is $6.50. Two thirds (67 percent) of the time, the price is expected to be between $6.50 and $9.
This expectation is a $3 spread and, in reality, it’s not wide enough.
One-third of the time, the price will be below $6.50 and one-third of the time the price will be above $9.
Wheat may be forward contracted for 2013 harvest delivery for about 60 cents less than the Kansas City Board of Trade (KCBT) July 2013 wheat contract price, which, at this writing, is about $8.20 cash.
Weather, and thus production, will determine future wheat prices.
An example of this is a story told in Genesis. During seven good years of production, the Egyptian government bought and stored all excess wheat production. During the next seven drought years, the Egyptian government bought all the land in Egypt and much of the surrounding area.
The morals of this story are: in good times, save your wealth to cover bad times; and, you can’t predict what the weather will do.
History has shown that tight wheat supplies may be replaced in one above-average year of production. It takes about two years to replace tight corn stocks. This said, wheat and corn prices are expected to remain near current levels until next spring for wheat and maybe next August or September for corn.
The world’s 2012/13 wheat marketing year wheat supply is nearly harvested. After Argentina’s and Australia’s wheat harvests are complete in late December, no additional exportable supplies will be available before the U.S. winter wheat harvest in June.
Reviewing last five years
Future wheat prices may be predicted by reviewing prices during the last five years. Since June 1, 2007, KCBT wheat contract prices have been between $4.53 (near this price several times between September 2009 and June 2010) and $13.95 (March 10, 2008).
Using a central Oklahoma elevator, the basis has been between a negative $1.29 (Aug. 2, 2010) and a negative 6 cents (Nov. 9, 2011). The average basis was a minus 66 cents.
The cash price range offered by a Central Oklahoma elevator was $3.39 (June 9, 2010) and $12.62 (March 10, 2008). On June 9, 2010, the Central Oklahoma basis was a minus $1.19 and on March 10, 2008, the basis was a minus 66 cents. The average price was $6.49.
These prices imply that over the next three to four years, the KCBT nearby wheat contract price is expected to be between $4.53 and $13.95. Cash wheat prices are expected to be between $3.39 and $12.62 with an average price of $6.49.
Cash prices above $10 may have been an anomaly. During the last 1,353 market days (between June 1, 2007, and October 18, 2012), cash prices have been above $12 on 3 days, above $11 on 15 days and above $10 on 25 days.
At this writing, wheat may be forward contracted for about $8.20. Since June 1, 2007, wheat was above $8.20 for 257 days or 19 percent of the time.
On the bottom side, prices have been below $4.50 on 213 days; below $4 on 76 days; and below $3.75 on 25 days.
Over the next two years, I will be surprised if Oklahoma and Texas wheat prices go below $4.50. Prices may go above $10, but if this happens, not much wheat will be available to sell. The average price is expected to be closer to $7.
Some producers complain about wheat price variability. As I compare the current $8.50 prices to the $3.50 prices of yesteryear, I am reminded of a picture in my office of an outhouse. The caption says, “Anyone who would like to go back to the good old days, just hasn’t been there on a cold morning.”