Marketing year's wheat prices may have peaked

Current U.S. hard red winter wheat conditions in Texas and Oklahoma indicate that the 2004 wheat harvest will start about May 20 in northern Texas and southern Oklahoma. Indications are that yields in Oklahoma and Texas will be less than last year. Because fewer acres were grazed out, a higher percentage of wheat planted acres are expected to be harvested.

To fill the heads, moisture for wheat in the heading stage is critical. Recent above average temperatures and strong winds tended to remove critical moisture. The difference in timely rains and hot, dry winds could change Oklahoma, Kansas and Texas's wheat production by 60 million to 80 million bushels.

The freeze in western Kansas and the Oklahoma and Texas panhandles did reduce some potential yields. Also recent storms have damaged some wheat in northern Oklahoma and southern Kansas. However, the damage does not appear higher than normal.

First crop estimates

On May 12 the USDA will release the first 2004/05 marketing year crop production estimates. The May 12 estimates will set the benchmarks for 2004/05 wheat marketing year prices.

Growing conditions for wheat and planting conditions for corn and soybeans have resulted in lower grain prices. During the last two weeks, Chicago Board of Trade (CBOT) corn contract prices have fallen about 40 cents and soybean prices have fallen about $1.50. During the same period, KCBT July wheat contract prices have fallen about 25 cents.

Critical price levels for the KCBT July contract are $4, $3.75 and $3.50. At this writing, the KCBT July contract price is down 13 cents to $3.99. Two consecutive closes below $4 imply that the next target price is $3.75.

Two consecutive closes below $3.75 imply that the next target price is $3.50. At this writing, some analysts are predicting the July contract to fall to $3.75.

Elevator bids

Northern Oklahoma and Texas panhandle elevators are bidding about 42 cents less than the KCBT July contract price for harvest delivered wheat. Thus, if the KCBT July contract price is $4, harvest delivered wheat could be forward contracted for $3.58 ($4 - $0.42).

Over the last month, the harvest basis bid has declined from a minus 30 cents to minus 42 cents. The basis decline reflects higher fuel costs and a potential shortage of trucks and rail cars during harvest.

Wheat harvest prices will depend on the weather, both U.S. and world. The 2004/05 marketing year price trends will depend on the foreign wheat crop. Major foreign wheat crop harvests begin in earnest in late August and early September.

Thus it will be early September before we have a good handle on potential 2004/05 wheat price trends. The odds are that wheat prices will average higher than last year.

The way things are looking now, a potential 2.2-billion-bushel U.S. wheat crop and a 22.1-billion-bushel world wheat crop imply that wheat prices may have peaked. On the other hand (a favorite economist phrase), if something happens to the U.S. crop and/or foreign wheat crop, wheat prices could hit $5 by Oct. 1.

Given that the opportunity to forward contract wheat for nearly $4 has passed and that there is uncertainty in the market, this may be a good year to sell one-third of the wheat at harvest, one-third in late September or early October, and the last one third in December/January. Just in case wheat prices hit $6 next spring, I recommend that 200 to 300 bushels be held in storage. Selling “the remainder of my wheat” for $6 is coffee shop bravado you do not want to miss. However, holding most of the wheat for $6 may be too much of a gamble.

An alternative is to sell all the wheat at harvest and buy “at the money” KCBT December wheat call option contracts. The call options will probably be relatively expensive. But not paying storage and interest will reduce the costs.

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