Wheat prices pleasant but sometimes frustrating

Since June, 1 2006, central Oklahoma and Texas panhandle producers have had the opportunity to sell wheat between $4.29 and $5.23. The highest price, $5.23, was offered on Oct. 16. On Oct. 17, wheat prices fell 17 cents.

In early June '06, U.S. wheat prices were projected to peak in late June or early July. The expected above-average foreign wheat crop, which is harvested in August and September, was projected to cause prices to decline. Foreign production has been less than June's expectations.

USDA's June 9, 2006, supply and demand estimates supported the expectations of declining wheat prices. The report projected U.S. wheat production to be 1.87 billion bushels compared to 2.18 billion bushels in 2005 and a five-year average of 2.03 billion bushels. Hard red winter wheat was projected to be less than 700 million bushels compared to 930 million bushels in 2005 and a five-year average of 849 million bushels. Prices tend to peak in short crop years.

USDA's June '06 projections were for U.S. 2006/07 wheat marketing year-ending stocks to fall from 547 million bushels to 416 million bushels. The five-year average U.S. wheat ending stocks was 590 million bushels.

World wheat production was projected to be 22 billion bushels compared to 22.8 billion bushels in 2005 and a five-year average of 21.6 billion bushels. World wheat ending stocks were projected to be 4.7 billion bushels compared to 4.4 billion for 2005/06 and a five-year average of 5.9 billion bushels.

Note that in June ‘06, Australian wheat production was projected to be 881 million bushels. Australia's 2005 wheat production was 900 million bushels and the five-year average was 791 million bushels. Australia's wheat production is currently projected to be 386 million bushels.

Some Oklahoma and Texas panhandle producers forward contracted wheat in early April for about $3.85. By June 20, wheat prices had increased to $4.40 and the price trend was up. On July 11, wheat prices peaked at $4.97.

By July 19, wheat prices had fallen to $4.57 and by August 17, wheat prices were $4.29. In mid August, reports indicated drought problems in Australia and Argentina's wheat producers had not planted as much wheat as expected. Prices bottomed and started an up trend.

By Oct. 16, central Oklahoma and Texas Panhandle wheat prices had increased to $5.23. Since then wheat prices have ranged between $4.75 and $5.23 and have been sporadically above $5 17 days.

To compare prices over time, prices must be adjusted for storage and interest costs. Using three cents per month commercial storage cost and five percent annual percentage rate interest, the cost to own wheat was about 4.8 cents per bushel per month or 0.16 cents per bushel per day.

Owning wheat from June 20 to Oct.16 (117 days) cost about 19 cents storage and interest. This reduced the peak price of $5.23 to a net price of $5.04. The first peak price on July 11 was $4.97 or $4.94 after storage and interest.

The net price on Nov. 15 was $4.73 ($4.97 - $0.24) and the net price on Dec. 15 was $4.54 ($4.83 - $0.29).

The 2006/07 wheat marketing year has been a year of uncertainty and price volatility. Tight U.S. and world wheat stocks will result in continued price volatility through at least September 2007 and possibly September 2008.

In volatile markets, it is essential that producers have a marketing plan and the discipline to follow the plan. Trying to “out guess” the market will most likely result in sleepless nights and no better price than if you had just sold one-third at harvest, one-third in early October and the final one third in November.

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