Benchmarks indicate $3.40: World and U.S. wheat production price keys

Producers are asking three questions about 2005/06 wheat marketing year prices. What will the price be at harvest? When will prices peak? And what will be the marketing year average price? Answers to these questions depend on how much and where the wheat is produced.

The two major unknowns that influence U.S. wheat prices are wheat supply and wheat demand. United States wheat production will mostly determine the U.S. supply. World wheat production will have the most influence on 2005/06 U.S. wheat exports, which will have the most influence on demand.

Production benchmarks are 2.13 billion bushels for the U.S. and 22.3 billion bushels for the world. These production levels will imply that wheat supply and demand conditions will remain about the same as this year and that the 2005/06 average annual price may be around $3.40.

On May 12, the USDA released the first 2005/06 wheat marketing year supply and demand estimates. This article was written before the estimates were released. The USDA May 12 estimates should be inserted into the following analysis.

In February, the USDA estimated that the 2005/06 marketing year average price would be $3.20. The USDA based this price estimate on 2005/06 U.S. wheat production of 2.085 billion bushels. The USDA world wheat production estimate was not presented.

Ending stocks

It is important to remember that U.S. wheat ending stocks were 546 million bushels in 2003/04 and are estimated to be 540 million bushels in 2004/05. The marketing year average price for both years was near $3.40.

Ending stocks for the 2002/03 marketing year were 491 million bushels and the average price was $3.56. If 2005/06 U.S. wheat ending stocks are about 540 million bushels, the average annual price should be near $3.40.

During the last five years, U.S. wheat production has averaged 2.06 billion bushels compared to 2.16 last year. Two percent less wheat has been planted this year compared to last year and yields are expected to be lower than last year's 23.2 bushels per acre. The five-year average is 40.9 bushels per acre and the record, set in 2003, is 44.2 bushels per acre.

Wheat 2005/06 supply will be a combination of beginning stocks (about 540 million bushels), imports (about 65 million bushels) and production. United States wheat production of 2.13 billion bushels could result in a 2005/06 wheat supply about the same as last year's 2.77 billion bushels and little change in stocks.

Wheat use for 2005/06 will be determined by food (about 900 million bushels), seed (about 78 million bushels), feed (about 200 million bushels) and exports (best guess — 1.0 billion bushels). Exports will partially depend on world wheat production and supply.

World wheat beginning stocks (5.4 billion bushels) are 600 million bushels higher than last year's 4.8 billion bushels. This means that 2005/06 world wheat production can be 600 million bushels less than last year's record 22.9 billion bushels and stocks will remain about the same for 2004/05.

World wheat production of 22.3 billion bushels would result in world wheat stocks about the same as in 2004/05 and the U.S. average annual price about $3.40.

There are two main ifs: If U.S. wheat production is 2.13 billion bushels and “if” exports are 1.0 billion bushels, U.S wheat ending stocks will remain around 540 million bushels and the average price will be near $3.40.

The market is currently offering $2.95 to $3 for harvest delivered wheat in central Oklahoma and the Texas panhandle. If the harvest price is below $3 and the average annual price is expected to be $3.40, then prices must increase during the marketing year.

If U.S. wheat production is above 2.13 billion bushels and world wheat production is above 22.3 billion bushels, the average annual wheat price would be closer to $3 and wheat prices would not be expected to increase much into the market year. Harvest prices below $2.80 will imply that prices will peak later in the marketing year.

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