# Would you take \$3.50 for 2004-harvested wheat?

If you would take \$3.50 for June 2004 delivered wheat, you should call you local elevator and forward contract it right now. Elevators in central and western Oklahoma and the Texas panhandle are forwarding contracting wheat for June delivery at 30 to 35 cents less than the Kansas City Board of Trade July contract price.

At this writing, the KCBT July wheat contract price is \$3.94. Using -30 to -35 cent June basis, elevators are offering between \$3.64 and \$3.59 per bushel for harvest delivered wheat. If you would take \$3.50, you need to hurry to get 14 to 19 cents more than \$3.50 before the KCBT July wheat contract price falls.

How good is a forward contract price of \$3.50? There is no way to know without something to compare the \$3.50 price to. Prices used for comparison may be historical prices or the inability to take the risk of lower prices.

The five-year national average annual wheat price is \$2.95. Oklahoma's June price has averaged \$2.67 over the last five years and \$3.17 over the last ten years. For the first half of the last ten years (1994 through 1998), the average Oklahoma June price was \$3.67. This included June 1996's average price of \$5.48.

If you compare the current market offer for June 2004 delivered wheat to the last five years (\$2.67), \$3.60 looks great. Compared to the 10-year average (\$3.17), \$3.60 still looks good. But when compared to the first five-years of the last 10 years (\$3.67), \$3.60 looks like an average price.

Another benchmark may be the “ability to take price risk.” The question to ask is “Which will hurt me worse, not having the opportunity to sell wheat at \$3.90 at harvest or having to sell wheat at \$3.20?” Both these 2004 harvest prices are possible. Fact is that 2004 harvest prices could be as low as \$2.75 or as high as \$4.50.

If you need the revenue that selling \$3.60 wheat would generate and cannot afford to take the risk of lower prices, it is time to forward contract some wheat. Be careful not to forward contract more than you will produce. A thumb rule that some producers use is to forward price a maximum of 50 percent of their five-year average production.

If you can afford lower prices but want to insure against a wreck like \$2.75, then buying KCBT July put option contracts may be a good alternative. A KCBT \$3.50 July put option contract may be purchased for about \$0.10 per bushel or \$500 for each 5,000-bushel contract.

A KCBT \$3.50 July put option contract will establish an expected minimum price of \$3.05 to \$3.10 per bushel (\$3.50 - \$0.35 basis - \$0.10 premium). This is an expected minimum price because the basis is unknown.

Weather will determine June 2004 wheat prices. Weather favorable to winter wheat production and planting of the 2004 spring wheat will result in prices below the current \$3.60 offer. Favorable weather in both the U.S. and foreign wheat producing areas could result in significantly lower prices.

United States and world wheat stocks are tight and U.S. corn stocks are declining. As the \$3.93 KCBT July 2004 wheat contract price indicates, the 2004 U.S. winter wheat crop is critical to meeting world wheat demand.

The critical time period will be when the winter wheat crop comes out of dormancy in March. Moisture is still short in the western part of the winter wheat belt. Moisture is near normal in northern Oklahoma and south central Kansas, which is the major production hard red winter area.