Wheat producers in the western U.S. winter wheat belt are experiencing dry conditions. Most wheat was planted with adequate moisture and has established an adequate root system. Agronomists indicate that most wheat is in “average” condition, however 20 to 25 percent of the wheat may be at risk.

There are some areas, like southern and southwestern Oklahoma that are in worse condition. Reports from southern Oklahoma indicate that some wheat acres will have to be “dusted-in.” There are some wheat acres in northwestern Oklahoma and western Kansas that will not get planted to wheat this year.

Agronomists also report that wheat in dry areas has stopped growing. This may increase the susceptibility to “blowing-out” or winterkill.

As reflected in the Kansas City Board of Trade wheat contracts, dry conditions are not having a “big” impact on current wheat prices. During the last two weeks, KCBT December 2003 wheat contract prices have increased about 50 cents per bushel while the KCBT July 2004 contract prices increased 30 cents.

Back off some

Kansas City Board of Trade December wheat contract prices peaked at $3.80 and then backed off to near $3.60. July wheat contract prices peaked at $3.57 and have backed off to $3.50.

Another indication of dry conditions' impact on wheat prices is that the KCBT December 2004 wheat contract price is five cents higher than the KCBT December 2003 contract price. Also, while the KCBT December contract has been trading in a range between $3.60 and $3.80, the July contract price range has been between $3.50 and $3.55.

The keys to nearby wheat prices are U.S. wheat exports and wheat production in the Southern Hemisphere. Argentina and Australia are the two major wheat crops the market is watching.

Australia's wheat harvest started in late October and Argentina's wheat harvest will start in early to mid November. The latest reports indicate that dry conditions in parts of Argentina may have reduced yields is being reported as a “mixed bag.” Most areas received timely rains, however there are still isolated areas where yields will be low.

Crop projections

Current projections are that Australia's wheat production will meet expectations. Argentina's wheat production may be reduced. The point that most analysts make is that the market will not have a “good handle” on Argentina or Australia's wheat production until late November or early December.

Total U.S. wheat exports are projected to be 1.05 billion bushels compared to 854 million bushels last year and a five-year average of one billion bushels. To meet USDA's 1.05-billion-bushel projection, wheat exports must be 19 percent higher than last year.

Current wheat export sales and shipments are 11 percent higher than last year. Thus, to reach USDA's export projection, weekly wheat export shipments must average over 25 million bushels per week. At the present time, that does not appear likely.

This implies that for higher prices to occur, either Argentina and/or Australia's wheat production must be less than expected or 2004 U.S. winter wheat production estimates must decline.

Producers that like to use put option contracts may want to watch the KCBT July wheat contract price. As the price increases, the $3.30 put premium declines. A $3.30 July put option contract may be bought for about 15 cents per bushel.

A $3.30 July put option contract will set an expected minimum price at about $2.85 ($3.30 put - $0.15 premium - $0.30 basis). This is near the loan rate. If prices fall below the loan, the put option value will increase and the deficiency payment will increase in value that will results in two cents gained for every cent lost in the cash price.