Wide Differences Exist Between Wheat Cash and Futures Prices

Struggling production of hard winter wheat and spring wheat in the West is fueling the higher futures prices.

Published on: Aug 16, 2006

With a season of increased acreage and higher-than-normal prices at the Chicago Board of Trade, soft red winter wheat growers jumped into harvest with high hopes of a nice profit. What they are getting instead is historically wide differences between cash and futures prices, and sale restrictions at grain elevators in response to excess supply and lack of storage.

"In all of those economic models you learn about futures prices and how they behave, you just assume that there will never be a problem in delivering and selling your crop because there will always be room for storage," explains Matt Roberts, an Ohio State University Extension agricultural economist. "However, current inventory is so large that some grain elevators have stopped taking wheat, and those that are, are enforcing very strict quality restrictions on the crop. So here is a classic example where we see a breakdown in theory."

Roberts has been busy fielding questions from growers on why the basis - the difference between futures prices and cash prices - is so wide. Where in a normal year the basis could be 10 cents under and in a high year 25 cents to 30 cents under, this year's basis is ranging from 75 cents to 90 cents below futures prices. Futures prices are topping out at $4 a bushel, yet wheat growers are getting only $3.10-$3.15 at the grain elevators.

"It's not uncommon to see the basis 20 cents or 30 cents under the futures prices, but going back over the last 25 years, I have not found any other time where the basis was as large as it is this year," Roberts says.

"And as the futures contracts expire, you would expect the cash and futures prices to be the same or close to it, but that is turning out to not be the case."

Struggling production of hard winter wheat and spring wheat in the West is fueling the higher futures prices. However, too much soft red winter wheat is still on the market.

"For example, at Toledo, a popular delivery point for Ohio growers, there were 29 million bushels of wheat in storage on June 1, 2005," Roberts says. "On June 1, 2006, there were 41 million bushels and at harvest we have about 4 million bushels more than last year.

"To restore equilibrium to the market, I would say that we need to see anywhere from 100,000 to 150,000 fewer acres of wheat planted this fall compared to 2005, assuming we have normal yields as we go forward." 

Ohio saw 100,000 more acres planted this year compared to last year, the result of high fuel prices and the hope of cashing in on the futures prices. This fall, many growers may end up reducing their acreage, however.

"I think a lot of producers are very disillusioned with the wheat crop right now," Roberts says. "They thought it would work well into their rotation but, for some, it's turning out to have been a costly decision."