Why Is There Such A Price Difference Between KC Wheat and Chicago Wheat Futures?
2 March 2023
When I go to the CME website, I have noticed that Chicago Soft Red Wheat is $7.12 a bu. and Kansas City Hard Red Wheat is 8.18, why the disparity? -Ben
Good Morning, Ben,
I will add Spring Wheat traded at the Minneapolis Grain Exchange is $8.74.
Soft red winter wheat is traded at Chicago.
Hard red winter wheat is traded at Kansas City.
Hard red spring wheat is traded Minneapolis.
Soft wheat is used for pastry flour. Hard wheat (spring and winter) is used for bread.
Hard wheat has higher gluten content than soft wheat. That is the reason there are fewer crumbs with bread than with cookies and cake.
In the big picture of life, bread is more important than cake, cookies, and donuts. Therefore, hard wheat is worth more than soft wheat. The majority of North America's hard wheat is winter wheat grown in Kansas followed in amount by Oklahoma, Eastern Colorado, Texas, Nebraska, even a little in Eastern New Mexico. That area (analysts call it the Southern Plains) has been in a severe drought for three years and generally drier than normal for 20 or so years.
The world is much more emotional about tight wheat supplies than corn or beans. Countries tend to hoard wheat to make sure the price of flour does not get too high. Because bread is more important than donuts, most of the wheat held in reserve is hard wheat. China alone, holds half of the world’s annual wheat carryover which is probably a good idea since they have 1.4 billion people who want to eat bread every day.
The most important fundamental factor for a commodity's price is the carryover; how much old crop will be left at the end of the marketing year? The current USDA wheat carryover projections:
Hard red winter wheat is 273 million bushels.
Hard red spring carryover is 120 million bushels.
Soft red winter wheat carryover is 102 million bushels.
Those numbers do not mean much to anyone except wheat millers and wheat traders, so we report carryovers by the number of days the carryover will meet the needs of the country or world.
The projected US carryover of hard red winter wheat is 152 days.
Hard red spring US carryover is 84 days.
Soft red winter US wheat carryover is 110 days.
As you can see, we have plenty of bread wheat, about 5 months, while we have less than 4 months’ worth of soft wheat.
The only explanation for the price of hard wheat being higher than soft wheat despite the hard wheat carryover being larger is simply that the price difference is the value the world puts on hard wheat compared to soft wheat.
Over the last four decades, hard wheat has generally been 40 to 50¢ higher than soft wheat, but not always. Soft winter wheat is grown mostly east of the Mississippi, where it competes directly for acres with beans, corn and, to some extent, cotton in the Southeast. When those commodities are more profitable than soft wheat, soft winter wheat acres have declined enough over the years that occasionally, soft wheat will be a higher price than hard wheat. Most of the hard wheat acres are on dry land where corn, beans and cotton cannot replace wheat.