Wheat prices peaked July 11, again

After the August USDA supply and demand reports, there was a 25-cent decline in the KCBT (KCBT) September contract price, a 17-cent price decrease in the Chicago Board of Trade September corn contract price and a 27-cent decline in the CBT September soybean contact price. Wheat, corn and bean price trends are down.

The long-run wheat price uptrend began on March 27 and resulted in a $1.24 price rally that peaked on July 11. The uptrend was broken on July 26 and the price downtrend was confirmed on Aug.t 8 when the KCBT December contract price closed below $5. Note that the market has rolled from the KCBT September contract to the December contract.

One reason for the price decline after the August USDA Supply and Demand reports was that the U.S. wheat-ending stocks estimate was above trade expectations. The USDA U.S. wheat- production estimate was lowered 10 million bushels to 1.80 billion bushels and ending stocks were lowered to 434 million bushels from 438 million bushels. Both were insignificant changes.

Prior to the USDA report, the average trade estimate for U.S. wheat ending stocks was 408 million bushels and the range was from 358 million bushels to 430 million bushels. USDA's ending stocks estimate (434 million bushels) was above the highest prerelease trade estimate.

The USDA lowered world wheat production 270 million bushels (1.2 percent) due to lower than expected production in Argentina, Canada and the European Union. World ending stocks were lowered from 4.89 billion bushels to 4.72 billion bushels.

Another indicator of tight world wheat stocks is the 2006/07 marketing year stocks-to-use ratio estimate (ending stocks divided by use), which was lowered to 20.9 percent. Since1960, the stocks-to-use ratio has not been this low. The closest world stocks-to-use ratio was in 1972 when it was 21.3 percent.

The U.S. 2006/07 marketing year stocks-to-use ratio is projected to be 21.3 percent. This is the lowest since the 1996/97 wheat marketing year when the ratio was 19.3 percent.

During the 1996/97 wheat marketing, U.S wheat ending stocks were 443 million bushels, up from 376 million bushels for the 1995/96 wheat marketing year. During June 1996, Oklahoma and Texas Panhandle wheat cash prices averaged about $5.48. The July '96 average cash price was $4.87. Cash prices fell to the $4.20 level by September trended sideways until June 1997.

One difference between the 1996/97 wheat marketing year and the 2006/07 wheat marketing year is that U.S. wheat production in 1996 was an average crop and U.S. wheat production for the 2006 wheat crop is below average. Note that in both 1996 and 2006, hard red winter wheat production was well below average. Another difference is that the 1995 U.S wheat crop was well below average and the 2005 U.S. wheat crop was about average.

These differences were reflected in the price trend prior to harvest. In 1996, wheat prices peaked on April 25 at about $7 and had fallen to about $5.50 by mid-June. In 2006, wheat prices peaked on May 22 at about $4.90, fell to about $4.30 by mid-June, recovered to $4.97 by July 11 and then fell to near $4.30 by mid-August. For the 1996/97 wheat marketing year, the average annual U.S. wheat price was $4.30.

Stocks are tight and lower production, if it happens, could dramatically increase prices. However, the foreign wheat harvest in the Northern Hemisphere is well underway and the market appears to have a relatively good estimate. Surprises are unlikely.

The market is watching the Southern Hemisphere wheat crop and moisture conditions for planting the 2007 U.S. hard red-winter wheat crop. There were problems planting the wheat crops in both Argentina and Australia and it is dry in much of the hard red-winter wheat area.

Watch the KCBT December wheat contract price. Critical price levels are $4.60, $4.80, $5, $5.20 and $5.40. If the KCBT December price is below $4.60, the odds are that the trend will be sideways to down. If the KCBT December price is above $5 then there is a 50/50 chance that the trend will be up.

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