At this writing, the Kansas City Board of Trade March contract price is $8.00, and the July contract price is $8.20. Cash prices in Oklahoma and Texas are around $7.60. Wheat may be forward contracted for about 55 cents less than the KCBT July wheat contract price. The Oklahoma/Texas Panhandle average annual price is about $6.40.

If it were not for the drought (near record poor growing conditions for the 2013 hard red winter wheat crop) and historically low corn stocks, the current cash wheat price might be closer to $6.60 than the current $7.60.  More than enough wheat is in storage to meet wheat demand.

The wheat supply and demand situation supports KCBT March prices at about $7.20 rather than $8. The market’s fear that 2013 U.S. hard red winter (HRW) wheat production will be less than average may be adding another 80 cents to current wheat prices.

The 2012/13 wheat marketing year world wheat crop has been harvested. Between now and June 30, the USDA is expected to make only small adjustments to the U.S. and world wheat supply situation.

The total U.S. 2012/13 wheat marketing year (June 1, 2012 through May 31, 2012) wheat supply is estimated to be 3.142 billion bushels compared to 2.974 billion bushels for the 2011/12 marketing year.

Domestic U.S. wheat use is estimated to be 1.4 billion bushels. Exports for 2012/13 are estimated to be 1.05 billion bushels. Total U.S. 2012/13 use is estimated to be 2.45 billion bushels compared to 2.231 billion in 2011/12.

United States 2012/13 wheat ending stocks are projected to be 691 million bushels compared to 743 million bushels last year and a five-year average of 790 million bushels. Wheat ending stocks were 306 million bushels in 2007/08 and 657 million bushels in 2008/09.

World wheat production, for the 2012/13 marketing year is projected to be 24 billion bushels compared to 25.6 last year and a five-year average of 24.8.

World wheat ending stocks are projected to be 6.5 billion bushels compared to 7.2 billion last year and a five-year average of 6.9 billion bushels. In 2007/08, world wheat ending stocks were 4.6 billion bushels. Ending stocks in 2008/09 were 6.1 billion bushels.

The average annual U.S. wheat price was $6.48 for the 2007/08 marketing year and $6.78 for 2008/09. It is projected to be $7.90 for 2012/13. Compare $7.90 with a projected 691 million bushels ending stocks to $6.78 with 657 million bushels. Something does not add up.

The price differential makes more sense when considering that 2012/13 U.S. corn ending stocks are projected to be 632 million bushels. Corn ending stocks were 989 million bushels last year, and the five-year average is 1.2 billion bushels. The feed market has spent the 2012/13 corn marketing year searching for grains to substitute for corn.

Current wheat prices have to be high enough to keep additional wheat from being exported or sold for feed in the U.S. The market is willing to pay more for wheat than to risk not having enough wheat to meet the 2013/14 market demand.

The message is that if timely precipitation is received and the 2013 U.S. HRW wheat crop condition improves, the market will not have to protect stored wheat. In this case, wheat prices will decline.

Wheat’s supply problem is not too little wheat; it is the potential of not having enough wheat in the future. Improvements in 2013 HRW wheat production expectations would result in lower prices.

At this writing, wheat may be forward contracted for harvest delivery at about $7.70. Average HRW wheat production could easily result in $7 harvest prices.

The good news is that the corn (feed) supply cannot improve until the U.S. corn harvest in September. The wheat supply problem could last until September and then lose another 50 cents.