United States 2004 winter wheat production below 1.53 billion bushels could result in June 2004 wheat prices being above $3.25. At this writing, the Kansas City Board of Trade July 04 wheat contract price is $3.74, which implies that central Oklahoma and Texas Panhandle June 04 wheat hedge price is $3.39 (KCBT July 04 contract price minus $0.35 June basis).

Important points are that U.S. wheat stocks are below average and world wheat stocks are the lowest since the 1981/82 wheat-marketing year. After Argentina and Australia complete their harvest, the 2004 U.S. winter wheat crop is the next wheat crop to be harvested. A short U.S. winter wheat crop would cause 2004/05 wheat prices to be dramatically higher than $3.25.

The first 2004/05-wheat marketing year price signal will be USDA's “Winter Wheat Seedings” report that will be releases Jan. 12, 2004. Benchmark seedings are last year's 44.9 million acres and the five year average of 42.9 million acres. Market expectations are for seedings to be near last year's 44.9 million acres.

Total wheat supply is a function of wheat production and beginning stocks. United States 2003/04 total wheat supply was 2.83 billion bushels (2.9 billion bushels with imports). Production in 2003 was 2.34 billion bushels and beginning stocks were 491 million bushels. With a 2003/04 total supply of 2.83 billion bushels, the average annual U.S. wheat price is projected to be $3.30 compared to $3.56 last year.

Total U.S. wheat supply for the 2004/05 marketing year is projected to be 2.74 million bushels. This is the current projected 608-million-bushel ending stocks and an assumption that 2004 production will equal the five-year production average of 2.13 billion bushels. If 2004/05 use equals 2003/04 marketing year projected use of 2.3 billion bushels, 2004/05 ending stocks would be 440 million bushels. The five-year U.S. wheat use is 2.3 billion bushels.

World wheat beginning stocks for 2004/05 are projected to be 4.0 billion bushels. This is 1.5 billion bushels less than 2003/04 marketing year beginning stocks. If 2004/05 world wheat production equals the 5-year average of 21 billion bushels; total 2004/05-world wheat supply would be 25 billion bushels.

During the last five years, world wheat consumption has been between 21.5 billion bushels and 22.1 billion bushels. The 5-year average is 21.6 billion bushels. Assuming average world production and consumption implies that 2004/05 wheat-ending stocks will be 3.4 billion bushels. This would be the lowest world wheat ending stocks since the 1975/76 wheat marketing year.

For world wheat ending stock to remain at the current 4.0 billion bushel level, world wheat production would have to be 22.3 billion bushels. This would be the second highest production on record. Record world production was set in 1997/98 at 22.4 billion bushels.

A lot can happen between now and this time next year when 2004/05 wheat production is known. However, the fact remains that any potential/actual decline in world wheat production (this includes the U.S.) will result in higher wheat prices.

After the Argentine and Australian crops, the U.S. winter wheat crop is the next crop to be harvested. Other world wheat crops that compete with U.S. exports are not harvested until August and September. This will support June/July U.S. wheat prices.

‘Lock-in’ risk

The market is currently offering attractive prices for June 2004. If prices are to be “locked in,” risk must be considered. Currently, the KCBT July contract is $3.74. Using a minus $0.35 June 04 basis implies a hedge price of $3.39. If something happens to the 2004 wheat crop, margin calls may be excessive.

One strategy is to buy KCBT 320 July put option contracts that cost about 7 cents per bushel or $350 per contract. This will set an expected minimum price of $2.78, which is about 8 cents above the loan rate. Next June if KCBT July contract prices are above $3.20, you lose the 7 cents and sell wheat at the higher price. If the contact price is below $3.20, you can sell the put to make up for the lower price.