FAPRI report...
Mixed price signals at wheat harvest confuse growers; market needs hard red wheat, not Missouri's soft wheat

"Wheat marketing just became more complicated for Missouri growers," said a University of Missouri economist.

Hard red winter wheat, grown in the Great Plains and used for bread flour, is in decreasing supply. Soft red winter wheat, grown in Missouri and used for pastries, is in plentiful supply, according to a USDA report.

Missouri wheat growers hearing reports of a drop in wheat production might falsely assume better prices ahead, said Melvin Brees, crop analyst at the MU Food and Agricultural Policy Research Institute (FAPRI).

"There is mixed news," Brees said. "The positive news is for hard red winter wheat; but the negative news is for soft red winter wheat.

"Hard red winter wheat production is down 29 percent this year. However, soft red winter wheat is up 16 percent. Worldwide, there is a shortage of hard wheat, but it appears there will be plenty of soft wheat to more than meet demand."

The difference shows up in price offerings.

July futures contracts for soft red winter wheat closed at just over
$3.73 on the Monday after the June 9 USDA crop report. The July futures for hard red winter wheat closed at almost $4.50.

"This is rather unique," Brees said. "There is a tightening of wheat supplies, except for soft red wheat which has increasing supplies."

Hard wheat is traded on the Kansas City Board of Trade. Soft wheat is traded on the Chicago Board of Trade.

"I expect to see the price spread between Chicago and Kansas City futures to continue," Brees said. "There is nothing in the outlook to suggest an improvement.

"It may be hard to understand for the average producer who hears the positive news but sees a big drop in local prices."

Further price spreads are seen between local elevators and the boards of trade. On June 12, price postings at local elevators showed a "cash basis," or price spread, of minus 35 cents per bushel at Caruthersville in the Bootheel to a minus 90 cents at LaPlata in northeast Missouri.

Other cash basis reports, all minus, were 85 cents at Centralia; 63 cents at Carrollton and Lexington, Mo.; 51 cents at Concordia and 39 cents at Trenton.

Normally, terminals with river transportation have better cash basis, Brees said. However there was a minus 65 cents at Hannibal.

"The market is saying 'check around,'" Brees said. "An elevator a short distance away may offer a better price."

One day last week, a semi-truckload of wheat hauled from one southwest Missouri town to another nearby, would pay $10 a truck mile per load, Brees said. "Don't look at just one place when it is time to sell.
Differences in cash basis can more than pay for the fuel to haul grain."

Markets in southwest Missouri may offer better cash basis at harvest time, as yields are projected to be short because of poor growing conditions, Brees said.

Within the state, the growing season varied. Overall, USDA projects Missouri wheat production at 46 million bushels, up from 29 million in 2005. Similar increases were seen in Illinois, Indiana and Ohio.

Elevator space can be tight as a large wheat harvest comes at a time when many elevators hold carryover stocks of corn and soybeans from two good crop years.

Cash basis is an indication of a local elevator's need for wheat, Brees said. If a local market can't use more wheat, the basis dips deeper into the minus levels. "It is what we have been saying," Brees said. "The market works."

"The basis is not encouraging, and it's hard to say when it will be better." Strong futures prices, however, offer opportunities for futures selling, Brees said. "There are futures options that might be profitable.

"The futures price offers to pay farmers to 'carry' the crop in their on-farm grain bins."

Wheat planted last fall is now being harvested in southern Missouri.
Harvest ends in north Missouri around the first week of July.

"New marketing strategies will be needed." Brees said. "It's no longer load the truck from the combine and haul wheat to the elevator."

Brees writes "FAPRI Crop Report Commentary," an e-newsletter, following the USDA outlook reports. Go to:
http://agebb.missouri.edu/mkt/croprpt.htm