2003-04 prices may drop below loan

“Rain makes grain.” More grain makes prices go down. Moisture over the U.S. winter wheat belt resulted in a 10 to 15 cent drop in wheat prices. Both “old crop” and “new crop” prices fell.

The Kansas City Board of Trade July wheat contract price fell from $3.46 on Feb. 10 to $3.26 on Feb. 27. Low export sales and improved wheat crop conditions were the main reasons that the prices fell.

The International Grains Council (IGC) released 2003/04 wheat production estimates. World 2003/04 wheat production is projected to be 21.9 billion bushels, about 5 percent higher than USDA's 2002/03 marketing year production estimate of 20.9 billion bushels.

World wheat consumption is projected to be 21.9 billion bushels during the 2002/03 marketing year. The five-year average is 21.4 billion bushels. This implies that world wheat stocks should be about the same or higher during the 2003/04 marketing year.

The IGC is predicting increased production in the European Union, Canada, Argentina, Pakistan, and Australia. Lower production is predicted in Russia, Ukraine, and India. China's production is projected to remain about the same.

Wheat prices are sensitive to changes in stocks. This past year when expectations were for U.S. wheat ending stocks to be about 350 million bushels, wheat prices were above $4.50. As ending stocks expectations increased to 445 million bushels, wheat prices fell to $3.25.

U.S. wheat consumption for the 2002/03 wheat-marketing year is predicted to be 2 billion bushels. Domestic use is predicted to be 1.12 billion bushels (seed — 84 million bushels; food — 940 million bushels; and feed — 100 million bushels). Export use is predicted to be 900 million bushels.

Some market analysts are predicting 2003 U.S. wheat production to be between 2.1 billion and 2.3 billion bushels. Using IGC's prediction of 2.1 billion bushels and 2002/03 marketing year wheat uses implies that wheat ending stocks will increase at least 100 million bushels to 545 million.

Another problem is that U.S. wheat exports are currently 10 percent less than last year. Total exports for the 2001/02 marketing year were 961 million bushels.

If 2002/03 exports are 10 percent less than last year, marketing year 2002/03 wheat exports will be about 870 million bushels rather than the predicted 900 million bushels and U.S ending stocks will increase to 475 million bushels.

Both U.S. and foreign (world) wheat stocks are projected to be higher next marketing year than this year. The market has already factored higher stocks into prices.

The KCBT July wheat contract price is $3.27. In mid-June, central Oklahoma and the Texas Panhandle wheat prices are expected to be 35 cents less than the KCBT July wheat contract price. Thus, the KCBT July wheat contract is projecting a mid-June price of about $2.92.

Given that the 2003 wheat loan rate in central Oklahoma and the Texas Panhandle will be between $2.80 and $2.90 (varying by county), there is not much risk for lower prices. If prices go below the loan, the loan deficiency payment (LDP) will increase to make up the difference between the posted county price and the loan rate.

The government program provides a price floor near the loan rate.

There are about 90 days left between now and harvest. A lot can happen to reduce yields. If poor growing conditions reduce yields, wheat prices could increase.

Since there is little downside price risk, there is little reason to worry about prices. Now is the time to develop a marketing plan for selling the 2003 wheat crop with the first potential sale during harvest.

Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail [email protected].

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