Odds on $3.70 Wheat Average Slim to None

If the USDA’s wheat price projection is correct, hard red winter wheat prices will increase. In the November 2017 WASDE (World Agricultural Supply and Demand Estimate) report, the 2016/17 wheat marketing year average price is projected to be between $3.50 and $3.90, with a mid-price of $3.70.

Since June 1, 2016, wheat prices at Goltry, Okla., have averaged $3.08 (Goltry’s price is a good representation of the Oklahoma and Texas actual posted price). The average price of wheat in Perryton, Texas, is $3.11. For prices in the 2016/17 wheat marketing year (June through May) to average $3.70, or even USDA’s low price range of $3.50, Goltry’s price would have to go into the $4.00 range relatively soon. The odds of this happening are extremely low.

A review of the USDA’s past average annual U.S. price estimates, compared to USDA’s Oklahoma average annual price estimates, shows that since June 2008, Oklahoma average annual prices have averaged 10 cents less than USDA’s average annual price estimates.

If this trend continues, the 2016/17 projected price range would be reduced to $3.40 to $3.80, and the mid-price to $3.60. For Oklahoma/Texas wheat prices to average $3.60, they would still need to increase to $4.00.

During the marketing-years 2008/09 through 2015/16, Oklahoma’s average annual price was 35 cents above the U.S. average price for the 2015/16 marketing year and 64 cents below that price for the 2010/11 marketing year.

Using the 2010/11 marketing year price difference (minus 64 cents), the projected price range is lowered to $2.86 to $3.26. The mid-price estimate of $3.06 is relatively close to Goltry’s current average of $3.08. The odds of cash prices hovering around $3.06 are relatively high.

The USDA has released monthly average prices for June, July, August, and September, 2016. For these four months, the U.S. average wheat price was $3.78. The average Oklahoma price was $3.35, a 43 cents difference.

Using a spread of minus 43 cents, the price range becomes $3.07 to $3.47, with a mid-price of $3.27. This projection implies that the Oklahoma cash price must increase into the $3.50 range. There is about a 25 percent chance of $3.50 cash wheat prices.

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There may be a problem with USDA’s average monthly price estimates for Oklahoma. For the months June through September, the monthly Goltry price has averaged 20 cents less than the average USDA monthly Oklahoma price. For these four months, USDA’s estimate of Oklahoma’s average monthly price is $3.35. The average of Goltry’s average monthly price is $3.15 (June–September).

Taking the USDA’s U.S. average price projection of $3.70 and subtracting 20 cents (difference between June through September U.S. and Oklahoma prices) results in an Oklahoma/Texas average price of $3.50. Adjusting an additional 20 cents, for the difference between USDA’s price estimate and Goltry prices, results in a mid-price of $3.30.

The USDA’s mid-price projection of $3.70 could imply that Oklahoma and Texas wheat prices must increase. However, the above analysis shows that, in every situation, Oklahoma and Texas wheat prices will average less than the USDA’s U.S. average price projection.

The question is, how much less? The 2010/11 marketing year’s 64 cent difference puts the mid-price estimate at $3.06. Given that the current price is $2.80, $3.06 may be a relatively good projection.

An alternative is $3.30, which is the USDA’s $3.70 minus the 20 cents difference between the four month U.S. average and Oklahoma’s four month average, and minus the difference between USDA’s estimated Oklahoma price and Goltry’s actual price ($3.70-$0.20-$0.20).

The facts show that the odds of prices averaging $3.70 are slim and none. The odds of prices averaging $3.06 are significantly higher.

Source: Kim Anderson, Southwest Farm Press

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