The Kansas City Board of Trade (KCBT) July wheat contract price was $6.15 on May 1, $7.26 on June 1, and $6.23 in mid-June. Some analysts credit the price rally on Fund buying and the downtrend on Fund selling. Most analysts that I read and talked to said there was too much wheat in storage and that the price rally would not hold. And they were right.

Since May 1, the local elevator basis has improved about 10 cents.

If U.S. and world wheat production expectations are met, wheat prices are expected to decline. The expected Dec. 1 central Oklahoma price is $5.20 and the expected Texas panhandle price is $5. This is $0.50 lower than cash prices posted on the day of this writing.

In the June Wheat Supply and Demand Report, the USDA projected that the 2009-2010 wheat marketing-year national average wheat price would be between $4.90 and $5.90 with a mid-point price of $5.40. At this writing, the Texas panhandle cash price is about $5.50 and the Oklahoma price is about $5.70.

The relationship between Oklahoma or Texas prices and the national average price changes over time. During the last two years, Oklahoma’s price averaged about 30 cents below the national average price. Between the 2001-2002 and the 2006-2007 marketing years, Oklahoma’s average annual price averaged about 10 cents less than the national price. The Texas panhandle price has averaged 15 cents to 20 cents less than the central Oklahoma price.

If the U.S./Oklahoma-Texas wheat price relationships hold and the USDA’s mid-price projection is correct, the 2009-2010 marketing-year average annual Oklahoma wheat price will be $5.10, and the average annual Texas panhandle price will be $4.90. This is about 60 cents lower than the current cash prices.

When developing a marketing strategy, first remember that the wheat price trend is normally set in late-August and early-September. If we lose a foreign wheat crop, the price projections will change.

Note that for the Dec. 1 cash price to be $5 in central Oklahoma, the KCBT December contract price would decline to about $5.70.

Next, check the KCBT December wheat contract price. If the contract price is above $6.50, hard red winter wheat production is probably less than expected, and wheat prices may not decline as much as predicted.

If the December contract price is between $6.20 and $6.50, the jury is still out, but the odds indicate that wheat prices will probably establish a downtrend. The short-run target price from the December contract would be $6.20 and possibly $5.90.

Producers who can’t afford to take the risk of cash prices below $5.50 should consider selling all their wheat at harvest. Producers who can afford to take some risk may want to sell one-half of the wheat at harvest and the remaining one-half during the late-September through November time period.

Another strategy for consideration is to sell all the wheat and buy KCBT December call option contracts to cover at least one-half of the wheat sold. Select a strike price near the KCBT December wheat futures contract price (at-the-money).

One problem with the call option contact strategy is that an “at-the-money” December call option premium is about 65 cents per bushels or $3,200 per contract. About 25 cents of this cost would be covered by not having to pay about 15 cents storage cost and about 15 cents interest cost. The net option cost would be about 35 cents per bushel.

The good news is that the 2009 wheat crop is in the bin and will soon be sold, if it isn’t already. The 2010 crop should cost about $125 less per acre to produce and should have more profit potential.