On Tuesday, Feb, 22, cash wheat prices increased about 24-cents per bushel. The Kansas City Board of Trade (KCBT) May contract price increased from $3.16 to $3.40, nearly a 24-cent price increase. On Feb. 22, the basis (cash price minus the futures price) held steady at a minus four cents.

Beginning Wednesday, Feb 23, the May contract price increased 2.5 cents and the basis fell 8.5 cents. Cash prices declined 6 cents. On Thursday, Feb 24, the May contract price fell 4.5 cents and the basis fell 1.5 cents. Cash prices declined another 6 cents.

The questions everyone asked were; “Why did wheat prices increase? And, why did the basis decrease?” The most common answers for the futures price increase was that the “funds” covered short wheat futures positions and the dry, hot conditions in Brazil were reducing the Brazilian soybean crop.

Early season soybeans are being harvested in Brazil and it is hot and dry in southern Brazil, which is a large soybean production area. The general consensus is that the weather is lowering Brazil's soybean production. Higher prices in one grain complex tend to cause other grain, wheat and corn prices to also increase.

The biggest reason for the price increases probably was that the commodity funds covered short (sold) positions by buying wheat futures contracts. Tuesday, Feb. 22, was a record volume day for KCBT wheat futures contracts. There were fewer sellers than buyers, so the buyers had to bid up prices to get people to sell wheat contracts. At the end of the day, wheat futures prices were 24 cents higher.

Higher KCBT wheat futures contract prices resulted in higher cash wheat prices. Producers own a higher percentage of wheat than normal. However, most were unwilling to sell wheat before Tuesday's prices rally. After the 24-cent rally, some producers sold their wheat.

On Wednesday, Feb. 23, the funds and other speculators were still buying KCBT wheat futures contracts. Thus, the wheat contract prices ended the day 2.5 cents higher. Wheat producers sold more wheat than the cash market wanted, thus wheat merchandisers lowered the basis 8.5 cents. The net result was a 6-cent decline in cash wheat prices.

On Thursday, Feb. 24, there were more sellers than buyers of KCBT wheat futures contracts and the May futures contract declined 4.5 cents. Producers were still selling wheat and the merchandisers lower the basis another 1.5 cents. A net 6 cent decline in cash prices.

A key point is that the commodity funds decided that wheat prices were about as low as they would go. We do not know what information the funds based their decisions on. However, their actions, getting out of their short positions by buying back the wheat contracts, indicated that their models and information signaled that wheat prices were not going much lower.

Another point is that producers still own a lot of wheat and are looking for opportunities to sell and that there are a limited number of buyers of cash wheat.

In a market situation where buyers want to buy wheat on an “as-needed basis” and producers that own wheat demand higher prices, prices tend to ratchet up. That is, prices will rally 10, 15 or 20 cents only to decline 5, 10 or 15 cents after the needed wheat is bought.

The market is watching the 2005 U.S. winter wheat crop. Currently, it is in good to excellent condition. Given that there are 4 percent less planted acres and above average rain was received over most of the winter wheat area, winter wheat production is expected to be less than last year.

During the week of Feb. 21, the wheat price down trend was broken. If the KCBT May wheat contract is trading above $3.50, then an uptrend will be established. Critical KCBT July wheat contract price levels are $3.35 and $3.15.