T. Randall Fortenbery
Professor and Thomas B. Mick Endowed Chair
School of Economic Sciences
Washington State University 

While wheat prices have been generally falling since the first of the year, local Washington prices have tended to perform better than the national market.

BofB Figure1Figure 1 shows the nearby futures prices for soft red winter wheat from June 1, 2014 forward (the current marketing year). It also shows cash prices for soft white wheat in Odessa, Washington. While prices for both futures and local white wheat have fallen significantly since the first of the year, white wheat prices have held up a bit better than the futures for soft red.

The difference between the local cash price and the futures prices is referred to as basis, and reflects differences between local supply/demand conditions and supply/demand conditions in the broader U.S. and international markets. When cash prices rise relative to futures basis is getting stronger, when they fall relative to futures basis is getting weaker. The key phrase, however, is relative to futures. Since January prices for all wheat have been trending lower, but because white wheat prices have not fallen by as much as the futures prices for soft red wheat basis in Washington has gotten stronger. Figure 2 illustrates the Odessa basis relationship over the previous two marketing years, as well as the current year.

Examining the first two quarters of the marketing year (June through November) we see significant variation in basis levels across years. In 2012/2013 local prices in Odessa were about $1 per bushel below futures early in the marketing year, and this past summer they were almost $1 per bushel above futures. However, note the convergence of basis behavior later in the year. In each of the previous two years basis behavior from mid-December forward has been quite consistent, and we matched that pattern again this year. We generally experience a strengthening basis in most Washington markets from the first of the calendar year until sometime in March. However, in each of the last two years the basis has weakened (cash prices fell relative to futures) significantly in the fourth quarter of the marketing year.

BofB Figure 2Figure 2 suggests we have maintained a strong basis a bit longer this year compared to the last two, but it will require an abnormal spring from either the demand or supply side for us to maintain this strength through the end of the marketing year. Otherwise Figure 2 points to significant basis weakness as we move through the next couple of months. Note that each of the last two years basis weakened by $0.75 to over $1 per bushel in the fourth quarter of the marketing year. This means that even if Chicago futures stabilize and remain relatively unchanged over the next several weeks producers still face a $1 per bushel risk on stored wheat if we experience a normal basis pattern.

Concerns related to re-plantings and winter stress could provide some support to white wheat markets, and help prevent the typical basis deterioration that occurs in the late weeks of the marketing year. However, the market to date does not appear to have priced a premium for production issues this year even though they are widely recognized. Production issues may have the greater impact on basis in late summer as we learn more about both crop quality and total acres harvested. Production concerns may not have much impact on basis levels experienced through the end of this marketing year unless significant damage is confirmed prior to the harvest season.

The white wheat carry-out on June 1 is expected to be less than last year but this has been anticipated for months so that by itself is not likely to support cash prices at abnormal levels relative to futures. This means avoiding the type basis weakness experienced the last couple of years may require stimulus from the demand side. For demand to help support a stronger than normal basis through the balance of the crop year we will likely need to see exports exceed their expected pace in April and May.

BofB Figure 3Through mid-March total white wheat exports were actually lagging year ago levels (Figure 3A) but what is more important is the pace relative to expectations. Figure 3B shows total accumulated exports each week from January 1 relative to the total needed each week to meet the USDA forecast. For much of the third quarter exports lagged the pace necessary to reach the 150 million bushel USDA forecast for 2014/2015. Going forward we will need to average about 3.13 million bushels a week in white wheat shipments to meet the USDA forecast. To maintain basis levels significantly higher than year ago levels we will need would to exceed that pace implying stronger than expected demand for the final weeks of the marketing year.

While there are concerns about the ability of white wheat basis to hold up over the next couple of months – through the end of the marketing year – there are reasons to believe white wheat prices could be quite strong relative to futures in the 2015/2016 marketing year. The current USDA carry-out projection for white wheat on June 1, 2015 is 33 million bushels. This represents the fourth year-over-year carryout reduction in a row. Further, it is even less than the carry-out in 2007/2008 which was the lowest in decades. If we combine that with poorer than average production prospects this year (based on weather stress and significant re-planted acres) cash prices will begin to appreciate relative to futures to reflect the tight supply as we progress through the harvest season. If you elect to hold old crop through the next couple of months, however, and basis does deteriorate as it has done in recent years you may need to be prepared to hold onto inventory though the summer and perhaps early fall to capture any basis improvement that may come from the tight carry-out and less than perfect crop prospects for the coming harvest. A stronger basis five or six months from now still does not guarantee a return to storage, however, unless futures prices stabilize and begin to trend higher.