When you think prices won't fall, they do

About the time we get comfortable with increasing prices, something happens that causes prices to decline. The Kansas City Board of Trade (KCBT) July wheat contract price broke the downtrend and reached $3.39 (closing price). Then general rain over Kansas, Oklahoma and Texas resulted in the KCBT July contact price falling to $3.16.

The good news is that the basis improved about 3 cents per bushel to about minus 24 cents in central Oklahoma and the Texas Panhandle. The Texas gulf basis is 43 cents.

This means that the Texas gulf price is the KCBT July wheat contract price plus 43 cents ($3.16 + $0.43 = $3.59). The central Oklahoma/Texas Panhandle price is the KCBT July wheat contract price minus 24 cents ($3.16 - $0.24 = $2.92).

On this date last year, the Texas gulf basis was 3 cents and the central Oklahoma/Texas panhandle basis was a minus 54 cents. On June 20, 2000, the basis was plus 3 cents at the Texas gulf and a minus 61 cents in central Oklahoma/Texas panhandle. The gulf basis is 40 cents higher than last year.

Key KCBT July contract price levels to watch are $3.10, $3.25 and $3.45. The current supply and demand situation indicates that the price should not go below $3.10. If the KCBT July contract closes below $3.10 two consecutive days, the KCBT July wheat contract price target is $2.90.

If the KCBT July wheat contract closes above $3.25 two consecutive days, the price target will be $3.45 per bushel. Some analysts indicate that prices are expected to trade in a 20-cent range and that the current price is near the bottom of the range.

Negative market price factors include cool moist conditions in the Great Plains that will delay harvest and potentially increase yields; higher Chinese wheat stocks; an increase in expected wheat production by major wheat importers; and a potential decline in the amount of wheat fed next marketing year.

Depending on the analysts, rain in the Great Plains may or may not increase wheat yields. What is certain is that the rain broke a hot/dry spell that had the potential to reduce wheat production.

The USDA revised China's wheat ending stocks. The result was that China's projected ending stocks for May 31, 2001, increased from 505 million bushels to 1.68 billion bushels. USDA's increase did not change China's or the world's ending stock situations; it only made adjustments for more complete information.

Because of the change in China's ending stocks, world wheat ending stocks projections increased from 4.3 billion bushels to 5.1 billion bushels. The overall wheat situation remains the same. Wheat stocks are still below average for the world and are expected to be below average for the United States by May 31, 2002.

Positive price factors include projected lower U.S. and world wheat stocks, U.S. wheat production below 2 billion bushels and world wheat production lower for the fourth year in a row, and potentially lower wheat crops in Canada and China.

Wheat prices are higher than they have been for the last three years and have the potential to move higher. The basis has gone from 20 to 25 cents below average to 5 to 10 cents per bushel above average. A strong basis is a signal to sell wheat.

If you sell at harvest, you may stay in the market by buying an “at the money” December or March call option contracts.

It costs about 5.5 cents to own wheat stored in a commercial elevator. This is 3 cents per bushel per month storage and 2.5 cents per bushel per month interest. An “at the money” KCBT December wheat call option costs about 20 cents per bushel, or $1,000 per 5,000 bushels contract. Selling wheat and not paying 3.6 months storage and interest costs will pay for a call option contract.

Since the U.S. winter wheat crop is about 8 percent of the world wheat crop, it is nearly impossible to predict wheat prices for the fall and winter period. Prudent producers develop marketing strategies that are simple, result in an average price or better in the long run and allow concentration on management activities that have the potential to increase profit more than chasing prices.

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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