The odds are that U.S. 2003 wheat production will be higher than 2002's 1.62 million bushels. Production will determine if 2003/04 marketing year wheat prices average $3.50 or $3.
Market analysts are predicting total U.S. wheat production will be about 2.35 billion bushels.
The USDA released the 2003 winter wheat production estimate on Jan. 10 after this article was written. Pre-release estimates by market analysts estimated hard red winter production to be about 1 billion bushels, soft red winter wheat about 400 million bushels and white winter wheat to be about 250 million bushels.
Total winter wheat was projected to be 1.65 billion bushels compared to 1.14 billion bushels in 2002.
Market analysts also project spring wheat production to be about 700 million bushels compared to 474 million bushels last year. Total production was projected to be about 2.35 billion bushels compared to 1.62 billion bushels last year.
The above were estimates made by market analysts before USDA's Jan. 10 release. The important numbers to compare are the pre-release estimate of 1.65 billion bushels for winter wheat, USDA's total winter wheat production estimate and the 5-year average winter wheat production of 1.53 billion bushels.
The market has been anticipating higher 2003 wheat production. In mid-October, the Kansas City Board of Trade July '03 wheat contract price was about $3.85. In early January the contract price was $3.35, or about 50 cents lower.
Two things have been happening in the wheat market. Note that while the July '03 contract price was falling 50 cents, the KCBT March contract price fell from about $4.70 to $3.60. The price decline in the July '03 contract was due to increased planted acres and higher 2003 production expectations.
The KCBT March contract price and cash price declines are due to lower export demand and higher 2003 wheat production expectations.
USDA's wheat export estimates indicate that U.S. wheat export sales are 6 percent lower than last year. Total 2002/03 marketing year exports are projected to be 950 million bushels compared to 960 million bushels last year and a five-year average of 1 billion bushels.
Total U.S. wheat 2002/03 marketing year wheat use is projected to be 2.13 billion bushels compared to 2.16 last year and a five-year average of 2.33 billion bushels. There is little reason to believe that 2003/04 U.S. wheat use will be much higher than during the last two years.
Use of 2.2 billion bushels and production of 2.35 billion bushels during the 2003/04 marketing year would result in a 150 million bushel increase in ending stocks to 500 million bushels. This would be the first increase in ending stocks in four years.
Higher wheat prices have also resulted in increased foreign wheat planted acres and higher production expectations. The result is that world wheat ending stocks are also expected to increase during the 2003/04 marketing year.
The KCBT July wheat contract is projecting central Oklahoma and the Texas Panhandle wheat harvest prices to be about $3 per bushel during harvest. The average government loan rate is $2.80.
A KCBT $3.20 July Put option contract may be bought for about 20 cents per bushel or $1,000 per 5,000 bushel contract. This would establish an expected price floor at $2.75 ($3.30 - $0.35 basis - $0.20 premium).
If prices go below $3.30, the lower cash price will be offset by the loan deficiency payment and the put option contract will also increase in value. Thus, for every cent the price goes below $2.75, there is the potential to gain a penny (LDP offsets lower price and the Put increases in value).
If prices go higher, the 20 cent premium is lost.
Between the lines: U.S. wheat stocks are the lowest since 1972. A lot could happen to lower 2003 U.S. and foreign wheat production expectations. There is more upside price potential gain than downside risk.
Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail Anderso@okstate.edu.