Kansas City Board of Trade May wheat contract prices have increased about 40 cents. The basis has declined 22 cents. The net cash price increase has been 18 cents. Central Oklahoma and the Texas Panhandle’s cash price is about $3.42.
Higher futures contract prices are the result of increased export demand for wheat, higher soybean and corn prices and lower production expectations for 2005 U.S. winter wheat. The lower basis is the result of producers selling 2004 wheat.
The KCBT July wheat contract price has increased about 50 cents and the basis offer for harvest delivered wheat has remained at about a minus 40 cents. Thus, wheat may be forward contracted for harvest delivery in central Oklahoma and the Texas Panhandle for about $3.25 per bushel.
The big question is: “How much higher will wheat prices go?” No one knows the answer for sure. However, current market conditions indicate that prices may increase at least another 15 to 20 cents. The major factors driving wheat prices will be the condition of the U.S. winter wheat crop, foreign wheat production expectations and wheat exports.
In the March, USDA wheat supply and demand report, the USDA lowered the U.S. 2004/05 wheat ending stocks estimate to 553 million bushels. This may be compared to 491 million bushels in 2002/03 and 546 million bushels in 2003/04. During the 2002/03 wheat marketing year (June 1, 2002 through May 31, 2003), U.S. wheat prices averaged $3.56. Wheat prices averaged $3.40 during the 2003/04 marketing year and are projected to average $3.40 for the 2004/05 marketing year.
In early March, the USDA projected that 2005/06 wheat marketing year wheat production would be 2.085 billion bushels. Some market analysts have predicted 2005/06 wheat production to be slightly above 2.1 billion bushels. Reports indicate that soft red winter wheat production expectations may have been lowered since early March.
Lower soft red winter production expectations relative to hard red winter wheat production expectations are reflected in the KCBT and CBT wheat futures contract prices. The KCBT May wheat contract price is $3.69 versus $3.62 on the CBT May wheat contract (KCBT May at 7 cents premium to CBT May). The KCBT July wheat contract price is $3.64 versus $3.69 for the CBT wheat July contract (KCBT July wheat 5-cent discount to CBT July wheat).
A relatively safe estimate of 2005/06 wheat production would be 2.1 billion bushels. This estimated may be slightly high. I would rather be surprised with higher prices than lower prices.
Both the USDA and some market analysts project wheat use in 2005/06 at about 2.15 billion bushels. If this is the case, 2005/06 wheat ending stocks would decline by 50 million bushels to about 5.0 billion bushels (2.1 billion bushel production minus 2.15 billion bushel use).
Past wheat ending stocks and price relationships indicates that the average annual 2005/06 wheat price would be about $3.40 to $3.50 per bushel.
Key estimates to watch are 2005/06 U.S. wheat production (2.1 billion bushel bench-mark). Lower production could result in lower wheat ending stocks and higher prices. Higher production could result in higher wheat ending stocks and lower prices.
The other estimate to watch is projected exports. Both the USDA and some market analysts’ project 2005/06 exports to be 1.0 billion bushels. Higher or lower exports than projected will impact ending stocks and wheat prices.
Remember that there is normally a spring rally and that wheat production is harder to predict than prices. It is three months until the harvest begins and a lot can happen.
What producers need to decide is, “Which will hurt the most? Not having the opportunity to sell wheat at $3.50 or having to sell it at $3.” If you cannot afford to take less than $3.25 for your wheat, consider forward contracting some of expected 2005 wheat production now.