The odds are that there will not be a counter cycle payment for 2003-harvested wheat. Thus, wheat producers that sold their 2003-harvested wheat before mid-August would have been better off if wheat prices had remained below the loan rate.
The USDA currently projects the 2003/04 wheat marketing-year average wheat prices to be $3.35 per bushel. The national average loan rate for the 2003 crop was $2.80 and the target price was $3.86. Wheat prices have no impact on the 52-cent per bushel direct payment. There is a direct relationship between the national average annual wheat price and the counter cycle payment. If the marketing-year average price is above $3.34, there will be no counter cycle payment.
If the USDA's $3.35 price prediction is correct and I believe it will be $3.35 or higher, there will not be a counter cycle payment for the 2003 wheat crop. This implies that producers that sold 2003 harvest wheat below $3.26 (after subtracting storage and interest costs) would have been better off if annual wheat prices would have averaged less than the $2.80 loan.
The loan deficiency payment insures that most producers receive at least $2.80 for their wheat (cash price plus loan deficiency payment). When the direct payment is considered, producers should receive about $3.26 per bushel. If prices average $2.80 or less, producers receive the $2.80 loan rate plus the direct payment for 85 percent of the base.
In this case, producers would receive $2.80 (wheat price plus LDP) plus the entire 54-cent counter cycle payment on 85 percent of the base. This is equivalent to 46 cents for the entire base ($0.56 × 0.85). And the net price would be $3.26 ($2.80 + $0.46 = $3.26).
Because there will be not counter cycle payment, producers that sold wheat at harvest for $2.82 (June 2003 average price in Oklahoma), netted $2.82. Wheat had to be sold after mid-August for the price received to be above the above $3.26 per bushel.
For the 2004 wheat crop, the loan rate is $2.75 and the target price is $3.92. The direct payment remains 52 cents. The potential counter cycle payment is 65-cents. If wheat prices average above $3.40, there will not be a counter cycle payment for the 2004 wheat crop ($3.92 - $0.52).
For producers to receive a net price (price received + counter cycle payment), equal to the loan plus the maximum counter cycle payment, wheat must be sold for $3.25 or higher. This is the $2.75 loan plus 85 percent of the potential 65-cent counter cycle payment.
Some elevators in central Oklahoma and the Texas panhandle are offering to forward contract wheat for harvest delivery at 30 to 35 cents less than the Kansas City Board of Trade July wheat contract price. At this writing, the KCBT July contract price is $3.77.
Thus, the market is offering $3.43 to $3.47 for harvest delivered wheat. This would more than cover the $3.25 price needed to protect the counter cycle payment.
Given the current U.S. and world wheat situation, the odds are that 2004/05 marketing year wheat prices will average nearly the same as 2003/04 marketing year prices. The market is predicting that the June wheat price will be around $3.40. I predict the price will be closer to $3.20.
World wheat stocks are tight enough that if the U.S. winter wheat crop is less than the expected 1.5 billion bushels, June wheat prices will be above $3.40. Conversely, if weather cooperates and the U.S. winter wheat crop is 1.6 billion bushels or higher, $3.20 may not be low enough.
Producers must decide how much risk they can afford. If the counter cycle payment is essential for survival, then they need to forward contract some wheat. If the counter cycle payment is “optional” money, then gambling on the market is an option.