Supplies push prices for short rally

Kansas City Board of Trade July wheat contract prices has increased about 20 cents per bushel to $3.47. If the KCBT July wheat contract price closes above $3.50 two consecutive days, the next target price is about $3.70.

Central Oklahoma and Texas Panhandle mid-June wheat prices normally run 35 cents less than the KCBT July wheat contract price. This implies that the market is projecting mid-June 2003 wheat prices to be about $3.13.

Poor soil moisture and declining wheat crop conditions in the Great Plains is the major reason wheat prices have increased. However, there are indications that 2003 wheat production will be lower in some key wheat production countries.

Lower production is expected in China, India, Russia and the Ukraine. Some Eastern European countries are also expected to produce less wheat.

China, the world's largest wheat producer, produced 3.38 billion bushels in 2002, averages about 4 billion per year and is expected to produce 4 percent less in 2003. Chinese wheat production has been declining since 1997's 4.5 billion bushel crop.

India, the world's third largest wheat producer, produced 2.65 billion bushels in 2002 and is expected to produce 5.5 percent less in 2003.

2002 Russian wheat production was 1.8 billion bushels. Projections are that Russia's wheat production will decline about 11.5 percent in 2003.

Ukraine wheat production in 2002 was 699 million bushels and is expected to be down about 13.5 percent in 2003.

All these countries are important to U.S. exports. China and India are potential customers and Russia and the Ukraine have become export competitors.

Higher 2003 wheat production is projected in the European Union (3.1 percent), the Unuted States (37 percent), Australia (167 percent), Argentina (22 percent) and Canada (74 percent). Total world wheat production is expected to increase about 6.7 percent.

The bottom line is that world wheat ending stocks may increase during the 2003/04 wheat marketing year, the first time since the 1997/98 marketing year. A 6.7 percent increase in world production would be 22.2 billion bushels. 2002/03 marketing year consumption is projected to be 21.9 billion bushels.

This implies that 2003/04 world ending stocks are expected to increase about 300 million bushels to 6.6 billion bushels, compared to a five-year average of 7.45 billion bushels. World wheat stocks would still be below average.

These production projections and the recent price rally imply that the market is concerned about wheat stocks. Also implied is that if production projections increase, prices could easily fall 20 to 25 cents.

Key KCBT July wheat contract prices levels to watch are $3.50, $3.70 and $3.30. If the price goes above $3.50, the next target price is $3.70. If prices go or stay below $3.50, the next target price is $3.30.

U.S. and foreign wheat stocks are relatively tight. There appears to be more upside price potential than downside rise. The upside is unlimited, within reason.

Downside risk is the government loan rate of about $2.80. Prices above about $3.30 reduce the counter-cycle payment. Higher KCBT July contract prices facilitate buying cheaper put option contracts that may help protect the counter-cyclical price.

If prices fall, the put increases in value relative to the strike price and prices below the loan rate result in LDP payments.

If prices in-crease, the put premium is lost but the value of the cash wheat in-creases. Selling wheat at the higher price may offset prices above the counter- cyclical payment.

Current supply-and-demand conditions imply that June 2003 wheat prices are expected to be around $3.20 per bushel. Both U.S and foreign wheat production will determine if the actual price is above or below current expectations.

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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