A couple of months ago I spoke at the Farm Forum in Spokane, and gave an outlook for U.S. agriculture. At that time China was already experiencing serious social disruption related to COVID-19, and I spoke a bit about how that might impact implementation of the Phase 1 trade deal signed with China earlier this year. Two months later and we are in the middle of a worldwide pandemic.
So how have wheat markets responded? In my February presentation I indicated that the USDA market year price forecast for the 2019/20 wheat marketing year was $4.55 per bushel, well below last year’s average price, and below USDA’s expectations earlier in the marketing year. This remains USDA’s market year forecast, and with only a few weeks left in the year (the marketing year ends May 31) it is unlikely to change much going forward. This price is important to wheat producers because it is the price used to determine whether there will be Price Loss Coverage (PLC) payments under the 2018 farm program for the current marketing year. The trigger PLC price is $5.50 per bushel, so if the current price projection holds producers will see significant PLC payments this year if that is the farm program option they have chosen.
Back in early February, Soft Red Wheat future prices for July delivery (the futures price most closely linked to white wheat prices in the PNW) were trading at about $5.53 per bushel. This was a significant improvement from the $4.85 per bushel price heading into the start of the marketing year’s second quarter (September 2019). Back in February, based on the implied volatility reflected in the July Soft Red Wheat futures options market, I suggested that there was a significant probability that prices would not exceed $6.00 per bushel, or fall below $4.50 going into the July contract expiration. In the weeks since the Farm Forum July futures have been volatile, but have exhibited daily closing prices in a $5.00 to $5.70 per bushel price range (Chart 1 below). Interestingly, the highs and lows of the trading range are only 6 days apart, suggesting increased uncertainty about where prices might end up mid-summer in more recent weeks. The current options market forecast is that there is only a 15% chance July futures will exceed $6.00 per bushel at contract expiration, and also a 15% chance they will be below $4.70 per bushel, so the U.S. wheat price expectation has remained quite stable despite all the turmoil in equity markets, and concerns about the length of constrained social activity. This can be seen in Chart 2.
A major component in supporting prices over the last couple of months has been improvement in the export picture relative to last year. Despite all the upheaval concerning to the current pandemic, the U.S. has exported over 9 percent more wheat through March this year than for the same period last year. In addition, after selling only 42 thousand metric tons of wheat to China through March of the 2018/19 marketing year, shipments to China this year have so far totaled over 194 thousand metric tons. More than 131 thousand metric tons of that has been Soft White Wheat shipped out of the PNW. The balance is accounted for by Hard Red Winter wheat.
If you want to know more about my outlook back in February and how it has changed over the last couple of months, tune into to Scott Yate’s recent podcast titled, The Why’s and Wherefore’s of Wheat Prices—WSU Economist Randy Fortenbery Sets the Scene and part two. Scott covers the wheat portion of my outlook from the Farm Forum, and he and I recently discussed updates to my analysis given world events over the last couple of months.
Chart 1. July 2020 Soft Red Wheat Future Prices
Chart 2. Probability (vertical axis) the July Soft Red Wheat Futures Price will be Equal or Less Than (horizontal axis) a Specific Price in July.
For questions or comments, contact Randy Fortenbery via email at r.fortenbery@wsu.edu or via phone at 509-335-7637.