Weather dominant '03 price mover

Since wheat was planted in October, Kansas City Board of Trade July 2003 wheat contract prices have fallen from about $3.90 to about $3.25. The decline in price was due to an 8 percent increase in hard red winter wheat planted acres and relatively good growing conditions.

During the same period, KCBT March wheat contract prices fell from about $4.80 to $3.40. The price decline was mostly due to weak export demand and rising ending stock expectations.

Total U.S. wheat exports are projected to be 925 million bushels compared to a 10-year average of 1.12 billion bushels. U.S. wheat export sales and shipments are 10 percent below last years' exports.

Hard red winter (HRW) wheat export sales and shipments are currently 13 percent below last year. Currently, the USDA predicts 2003/03 HRW wheat exports will be 355 million bushels compared to 348 million bushels last year.

The odds are that HRW wheat export projections will be lowered.

Because of lower wheat exports and feed use, the USDA has raised ending stocks projections from 348 million bushels to 418 million bushels. Given that the 10-year average is 670 million bushels and the five-year average is 850 million bushels, U.S. wheat stocks are still relatively tight.

Since late January, both KCBT March and July wheat contact prices have increased about 20 cents. The July contract increased to $3.40 and the March contract to $3.60. The price increase is due to dry conditions in the Great Plans and to low precipitation in January.

Stocks are relatively tight in the United States however; foreign wheat stocks are about average. The USDA projects foreign wheat ending stocks to be 6.3 billion bushels compared to a 6.1 billion bushel 10-year average.

Between now and the 2003 wheat harvest, weather and wheat stocks will be the driving forces for prices. Weather will have a two-pronged impact.

First will be determination of 2003 wheat production. Second will be the markets reaction to production expectations.

If the market expects a relatively large 2003 wheat crop, buyers will delay purchases until the new crop is being harvested and prices have fallen. This would result in relatively lower prices now and relatively higher prices at harvest.

The long run impact would be neutral.

If weather patterns result in lower wheat production expectations, buyers will purchase wheat now. This would result in relatively higher prices now and at harvest.

Producers who want to price 2003 wheat should consider forward contracting or buying put option contract on the weather rallies. One strategy is to buy a KCBT $3.30 July wheat put option contract.

With the KCBT July wheat contract price at $3.40, the premium on the $3.30 put is about 17 cents. The projected basis for Central Oklahoma and the Texas Panhandle is about a minus 35 cents. Thus the expected minimum price would be $2.78 ($3.35 - $0.35 - $0.17). The $2.78 minimum price is projected because the basis will not be known until harvest.

An alternative is to forward contract and buy a call option contract. A $3.40 July call option contract may be purchased for 23 cents. Some Oklahoma elevators are forward contracting for harvest delivered wheat at a minus 25-cent basis ($3.40 - $0.25 = $3.15).

The “locked in” minimum price would be $2.92 (43.15 - $0.23).

The beauty of the put option or the forward contact plus the call option is that if wheat prices go below the loan rate, the net price received will increase as prices go down.

Conversely, if prices go up, producers can capture the higher price by selling the wheat if they used the put or by cashing in the call if they forward contracted and bought a call.

There is no sure way to beat the market. No one knows what the weather will do. There are only choices between courses of action. Each risky, each uncertain and each with it own outcome. Producers must decide which actions will let them sleep at night.

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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