At this writing, wheat prices have gained about 33 cents, corn 15 cents and soybeans 65 cents. The price increases may be attributed to strong export demand, drought conditions and fund buying. Export demand is the major force; however drought conditions are raising concerns for 2006 wheat and corn production.

The USDA projects 2005/06 wheat marketing year exports to be 1 billion bushels compared to 1.063 billion bushels during 2004/05. This is a 6 percent decrease.

For the week ending Dec 15, total wheat export sales were 2 percent lower than for the same time last year. For the week ending Dec 15, total wheat export sales were 14 percent above the four-week average. To meet USDA's export projection, weekly wheat export shipments must average 19.5 million bushels (531 thousand metric tons).

The USDA projects 2005/06 hard red winter (HRW) wheat exports to be 440 million bushels compared to 388 million bushels last year, a 12 percent increase. Total HRW wheat sales are currently 18.5 percent higher than last year. To meet USDA's export projection, weekly HRW exports need to average 9.25 million bushels (252 thousand metric ton). Hard red winter wheat exports are 8 percent above last year and outstanding sales are 69 percent above last year.

Both corn and soybean export demand has improved. Corn export sales are f5 percent below and soybean exports are 10 percent below this time last year, but during the last two weeks, export demand has improved for both commodities.

Drought conditions continue to worsen over much of the U.S. winter wheat area. The drought band covers nearly all of Arizona, New Mexico, Texas, Oklahoma, Arkansas, Tennessee and Kentucky in the South. The northern drought band includes Washington, Oregon, Idaho, Wyoming, South Dakota, Iowa and Illinois. Important winter wheat areas not currently impacted by the drought are the southern half of Kansas and parts of Missouri.

World and U.S. wheat stocks are sufficiently tight that below average 2006 winter wheat production will have a relatively large impact on wheat prices. During the last five years, central Oklahoma and the Texas panhandle June wheat prices have averaged about $3. This is equivalent to a KCBT July wheat contract price of $3.32.

The Kansas City Board of Trade July 2006 wheat contract price shows the markets concern about tight stocks and the potential drought impact. At this writing, the KCBT July 2006 wheat contract price is $3.81. Using a minus 32-cent basis, this implies that the market is offering $3.49 for June 2006 delivered wheat.

The 90-day weather forecast is for below average precipitation in the Texas Panhandle and the southern 90 percent of Oklahoma. Normal precipitation is projected for the northern 10 percent of Oklahoma and Kansas. Northern Oklahoma and southern Kansas comprise the major HRW wheat production area.

History has shown that wheat has the ability to recover from adverse conditions and that yield is determined in the March through May time period. Many times when potential yield looks like a disaster, timely rain and favorable temperatures result in above-average yields.

Watch the KCBT July wheat contract. The current support and resistance prices are $3.60 and $3.80. Two consecutive closes above $3.80 imply a target of $4. If the July contract closes above $4, look for pricing opportunities.

The five-year average Oklahoma June basis is a minus 32 cents. A short crop could result in a stronger basis (i.e. -20 cents). Before forward contracting, subtract the KCBT July contract price from the forward contract price. If the basis is not close to a minus 32 cents, consider hedging or buying put option contracts.