At what price would you sell 2005 wheat?

At this writing, the market is offering about $2.91 for wheat delivered next June. This was calculated by subtracting the minus 35-cent basis elevators are offering for June 05 delivered wheat to the KCBT July wheat contract price ($3.26 - $0.35). The average government wheat loan for 2005 is $2.75.

A price offer of 12 cents above the government loan may not be worth considering. The real question is, “What price would make you forward contract your wheat?” The answer may depend on the potential prices and how much risk you can take.

My current price prediction for June 20, 2005 in central Oklahoma and the Texas panhandle is $2.60. The KCBT July '05 contract price and current elevator basis offer indicates a June 20 price of $2.91.

One problem in reviewing past prices is that in 1996, the monthly average June price was $5.48 per bushel. Using the monthly average June 1996 price may bias wheat prices upward.

For example, the 5-year monthly June price is $2.88. The 8-year monthly average June price is $2.86. However, the 10-year monthly average June price is $3.20. If the 1996 average June price ($5.48) is removed, then the 10-year monthly average June price declines to $2.94 and the 20-year average price is $2.93. With the June 1996 ($5.47) price included, the 20-year average price was $3.05.

During the 20-year period 1985 through 2004, average monthly June wheat prices have ranged between $2.31 (1999) and $3.87 (1989). (Note that the $5.48 June 1996 price is being ignored.) For 14 out of the 20 years, the average June price was below $3.

These average prices indicate that there is about a 50 percent chance that the 2005 monthly average June wheat price will be above $3 and a 50 percent chance than it will be below $3. Based on the last 20 years, there is about a 20 percent chance that wheat prices will be below $2.50 and a 20 percent chance that wheat prices will be above $3.50.

Based on the above price information, what price would you accept for June 2005 delivered wheat? Given that the government loan is $2.75, it is only a 25-cent gamble to hold out for $3 or better.

Using a minus 35-cent basis, the KCBT July '05 wheat contract price must be $3.35 for the market to offer $3 for June 2005 delivered wheat.

One way to develop a marketing strategy for 2005 wheat is to set prices to sell the wheat. For example, you could decide to sell one-fourth of the wheat at $3.25, one-fourth at $3.50, one fourth at $3.75 and the remainder at $4.

Between now and harvest, you would watch the KCBT July '05 wheat contract price and subtract 35 cents to convert it to central Oklahoma or the Texas panhandle. A KCBT July '05 contract price of $3.65 indicates the opportunity to forward contract for $3.25.

A better basis to use would be to ask your local elevator what basis is being used to determine the June 2005 forward contract price.

United States wheat ending stocks are projected to be about the same as last June. The Oklahoma/Texas panhandle average June 2004 wheat price was $3.47. If something happens to the 2005 U.S. winter wheat crop, June 2005 wheat prices could be near last year's levels.

It is not possible to accurately predict the June 2005 wheat price. What is important is that you understand which prices are likely to occur and to develop a written plan to sell the wheat.

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