At this writing, the Kansas City July '06 contract price is $5.06. This implies that the market is offering about $4.76 per bushel in central Oklahoma and the Texas Panhandle. The question is, “Should you take this price or hold out for higher prices?”
Many producers think that the answer depends on whether price goes up or down. If price goes higher, you should not have sold and if price goes down, you should have sold. The real answer depends on how much price risk is in the market, how much price risk you can afford and what decision will let you sleep at night.
During the last two weeks, the wheat price has increased 66 cents. Twenty-six cents of the price increase has been in the last three days. Price often falls faster than it increases. This alone implies 66-cent price risk.
The price of wheat is relatively high. The last time wheat prices were above $4.50 was in October 2002 and the last time the wheat price was above $5 was in June 1996.
On April 25, 1996, the wheat price peaked at $7.10. By June 3, the price had fallen to $5.48 (-$1.62). The price was $4.95 on July 1 (another -$0.53) and had declined to $4.18 by the end of the year (another -$0.77).
In 2002, the price peaked at $4.70 on Oct. 17. On Nov. 15, the price was $4.18 (-$0.52) and the price had declined to $3.85 by Dec. 31 (-$0.85). Prices did not have as far to fall in 2002 and in 1996.
Price is relatively high because both U.S. and world wheat stocks are relatively tight. United States 2006/07 wheat marketing year-ending stocks are projected to be 447 million bushels. Ending stocks for the 2005/06 marketing year are projected to be 547 million bushels and the five-year average is 580 million bushels.
World 2006/07 wheat ending stocks are projected to be 4.7 billion bushels compared to 5.3 billion bushels in 2005/06 and a five-year average of 5.8 billion bushels.
For the 1995/96 wheat marketing year, U.S. wheat ending stocks were 376 million bushels and world wheat stocks were 6.1 billion bushels. In the 2002/023 marketing year, U.S. wheat ending stocks were 491 million bushels and world wheat ending stocks were 6.1 billion bushels.
The market has factored tight wheat ending stocks into the current wheat price. The U.S. wheat harvest has just started. If winter wheat production is greater than the projected 1.32 billion bushels, wheat prices may decline 66 cents.
If temperatures remain hot in northern Oklahoma and Kansas, wheat production will be less than expected and the wheat price could increase 75 cents. This brackets the June wheat price between $4.10 and $5.45.
To get price to above $5.45 and into the $6 range, foreign wheat production will have to be less than expected. Current market reports indicate the odds of significantly less foreign wheat production are relatively low. The weather has caused surprises.
The point is that wheat stocks are tight and less than expected production may cause a dramatic price increase. If production is higher than expected, price may fall but probably not to the same extreme.
Producers should ask themselves, “Which will hurt me the worst, selling wheat for $4.76 and not having the opportunity to sell at $5.45 or not selling at $4.76 and having to sell at $4.10?” If you can not afford to sell at $4.10, take the current price. If you can afford the price risk and can sleep at night, hold for a higher price.
Another strategy is to set price targets. For example, the current price is $4.76. Plan to sell a percentage at $4.98 or $4.60 or June 20, whichever occurs first. If the price goes to $4.98, you sell a percentage. If the price declines to $4.60, you sell a percentage. If neither price has occurred by June 20, you sell the percentage.
This strategy takes the emotion out of marketing decisions. With a relatively high price and price volatility, emotion often impacts the sale decision.