It may be hard for producers to turn down $3.85 for June 2006 delivered wheat in Oklahoma and the Texas Panhandle. But because of drought conditions, producers and merchandisers are uncertain how much wheat will be produced.

Buyers want to lock in price and quantity for 2006 wheat. Producers, who are uncertain about how much they will produce, are reluctant to lock in quantity at any price. Tight world and U.S. wheat stocks add to price volatility and may create a market situation for substantially higher wheat prices.

Now is good time to review current and past wheat supply and demand situations and speculate what prices will do during the 2006/'07 wheat-marketing year. The 2005/'06 wheat marketing year ending stocks will set the stage and 2006 wheat production will be the major force for price movements.

Note the average annual price/ending stocks relationship with U.S. wheat ending stocks: 2005/'06 marketing year ending stocks — 542 million bushels and $3.38 average price; 2004/'05 — 540 million bushels and $3.40; 2003/04 — 546 million bushels and $3.40; 1994/'95 — 507 million bushels and $3.45; 1993/'94 — 568 million bushels and $3.20 and 1992/'93 — 531 million bushels and $3.24; 1995/'96 marketing year — 376 million bushels and $4.55; and for 1996/'97 — 443 million bushels and $4.30.

When U.S. wheat ending stocks were near 540 million bushels, average annual U.S. wheat prices were about $3.40 per bushel. Lower ending stocks resulted in higher prices and higher ending stocks resulted in lower prices.

The USDA projects that beginning stocks for the 2006/'07 marketing year will be 542 million bushels. The USDA will make the first production and consumption projections on May 12, 2006.

For marketing years, June 2001 through May 2005, domestic wheat use has averaged 1.17 billion bushels and ranged between 1.12 billion bushels and 1.19 billion bushels. The 2005/'06 marketing year domestic use is projected to be 1.19 billion bushels. An estimate for 2006/'07 domestic wheat use is 1.17 billion bushels.

For the same five years, U.S. wheat exports have averaged 1.0 billion bushels and ranged between 850 million bushels and 1.13 billion bushels. The 2005/06 wheat-marketing year exports may be projected to be 1.0 billion bushels.

World wheat stocks are projected to be 5.3 billion bushels compared to a five-year average of 6.3 billion bushels. For the last five years, world-ending stocks have ranged between 4.9 billion bushels and 7.4 billion bushels.

World wheat stocks should remain relatively tight through the 2006/'07 marketing year. Relatively tight stocks support foreign demand for U.S. wheat at about 1.0 billion bushels.

Domestic consumption of 1.17 billion bushels and export demand of 1.0 billion bushels would result in 2006/'07 marketing year wheat demand of 2.17 billion bushels.

Total wheat supply for 2006/'07 will consist of beginning stocks (542 million bushels), imports (about 85 million bushels) and production (unknown).

During the last five years, U.S. wheat production has averaged 2.03 billion bushels and has ranged from 1.61 billion bushels to 2.34 billion bushels. Current drought conditions imply that 2006 wheat production will be average or less.

Average production (2.03 billion bushels) would result in 2006/'07 marketing year ending stocks of 487 million bushels (Supply = 2.03 billion bushels + 542 million bushels minus 2.17 billion bushels used). As shown in the ending stocks and price relationships above, as ending stocks approach 443 million bushels, the average annual price approaches $4.30.

The message is: Watch projected U.S. wheat production. An average crop should result in wheat prices averaging above $4. If it starts raining and the yields are above average, prices will average lower than $4. Right now the bet is on a belowaverage crop. Bets are often reversed rapidly.