A “limiting factor” in the value of USDA’s farm price forecasts for wheat in monthly World Agricultural Supply & Demand Estimates (WASDE reports) is that the range shown is for all five classes of wheat combined. That’s like whipping five flavors of ice cream together in a bowl and then telling consumers who prefer a certain flavor to be satisfied because their flavor is “in the mix”.
The February WASDE was released Thursday, narrowing its January range for the season average farm price for “all” wheat by a nickel at both ends, to $4.55-$4.65. But depending on which class of wheat a producer raises, that range seems optimistic, pessimistic or neutral from where his or her prices stand today!
All one has to do is look at the price spreads among futures prices for soft red winter wheat at the CBOT, hard red winter at the KCBT and hard red spring at the MGE to know USDA’s “all wheat” price isn’t much help in assessing futures prices for possible hedging opportunities. (Monthly WASDE reports do offer class-by-class supply/demand balance sheets, with varying ending stocks … but no price forecasts by class.)
My WASDE Wizard™ price forecasting model solves the problem. That model suffered the same limitation in value to clients unless I found a “price apportionment tool” to break USDA’s “all wheat” price range forecasts down by class. Here it is:
Of course, you need to be familiar with EXCEL to recreate the formulas that drive all the values shown in black or green font in the tool above. Hopefully, the headings adequately describe each calculation being made. You’ll know you’ve got them correct when the formulas you plug in generate the same values I show in black or green font above. These are the values generated by the tool on Feb. 8th; the date USDA issued its February WASDE mentioned earlier. Once yours match, you can lock the formula cells and then update the cells in red font whenever you want.
Even though the WASDE price range for the 2017 crop merely narrowed, leaving the midpoint for all wheat unchanged at $4.60, USDA did raise estimated ending stocks by 20 million bu. on reduced exports. That boosted the ending stocks-to-use ratio from a 173-day supply to a 178-day supply. That ratio and the price range itself are among components of algorithms that drive my Wizard model forecasts for 2018 crops. Thus, clients noticed a different set of price forecasts for each class under three different weather, yield and price scenarios for 2018 with Thursday’s WASDE data dialed in.
For those concerned that this price apportionment tool doesn’t factor in the different distribution of wheat production among the five classes factored into USDA’s all wheat price forecasts, this should reassure you: I took this same price apportionment tool and weighted the prices for HRW, SRW and HRS in Step 2 according to the breakdown of production among just those three classes.
What I found was that the resulting price ranges varied by less than 1% from USDA’s February WASDE range for all five classes, even though this price apportionment tool doesn’t take durum or white wheat prices into account at all. That’s “close enough to trust” for producers of the three dominant classes of wheat traded at the three futures exchanges.
Note to new BARE KNUCKLES followers: If curious about the WASDE Wizard™ price forecasting model itself, check my website https://www.perfectfitpresentations.com where you will find descriptive videos. Check also previous blogs on this site as well!