Wheat prices increased (in my opinion) an economically unjustified 76 percent. Prices then declined to about 60 percent of June 2010 wheat prices. Many analysts thought that prices were still too high relative to the supply and demand conditions.

In every endeavor is a degree of luck. Recent wheat condition reports for the Russian, Ukraine, German, Pakistan, Argentine, and Australian wheat crops tended to support higher wheat prices rather than the analysts' opinions. This result may be a case of the weather cooperating with the speculators.

An Allendale, Inc. report indicates that the Index and Trading Funds own record or near record long (bought) grain futures positions. Index Funds have held about 35,000 long KCBT wheat contracts for the last several months.

Trading Funds' KCBT wheat contract positions, over the last two months, have gone from a net short (sold) position to owning nearly 50,000 long contracts. Since mid-June, the KCBT Nearby wheat contract price has increased from about $5 to just over $7. Trading Fund purchases of about 55,000 wheat contracts are a major reason for the higher prices.

Will the KCBT wheat futures contact purchases be profitable? In my opinion, the Trading Funds are betting on lower wheat production in Argentina and Australia and on possibly lower South African wheat production having a minor price impact.

If the wheat supply and demand situation does not change, the Trading Funds may take a beating. In the September 2009 USDA/WASDE Supply and Demand report, 2009/10 wheat marketing year U.S. ending stocks were projected to be 743 million bushels. World wheat ending stocks were projected to be 6.9 billion bushels. The projected U.S. 2009/10 marketing year average wheat price was $5.10.

The August 2010 USDA/WASDE Supply and Demand report projected 2010/11 U.S. wheat marketing year ending stocks to be 952 million bushels and world ending stocks to be 6.4 billion bushels. The five-year average U.S. wheat ending stocks is 670 million bushels and the five-year average world wheat ending stocks is 5.8 billion bushels.

U.S. wheat ending stocks above 900 million bushels and world ending stocks above 6.0 billion bushels may not support $7 KCBT wheat futures contract prices and $6 Oklahoma and Texas cash prices.

Major wheat harvests that may impact wheat prices include Canada, Argentina, and Australia. Wheat production in Russia and the Ukraine is still somewhat uncertain. Speculation is that Russia may be a net wheat importer.

Reduced wheat production in Canada, Argentina, and Australia are already factored into the wheat price. Without additional reduction in production expectations, wheat prices will probably decline.

Current ending stocks expectations imply, that during June 2011, KCBT July 2011 wheat contract prices may be around $6. Texas and Oklahoma cash prices are expected to be about $4.80. In comparison during the month of September 2009, the KCBT July 2010 wheat contract price averaged $5.18. The forward contract basis for 2010 harvest delivered wheat was about a minus 80 cents and the forward contract price for 2010 harvest delivered wheat was $4.38.

At this writing, the KCBT July 2011 wheat contract price is $7.25. The forward contract basis is about a minus $1.25, which implies a June 2011 forward contract price of $6. With about a 200 million bushel increase in U.S. wheat ending stocks (Sept 2009 vs. September 2010), how can the market justify offering $1.40 more for wheat?

Consider forward contracting a percentage of expected 2011 harvested wheat. If 2011 wheat production is average or better, $6 will look great. If 2011 wheat production is significantly below average, $6 may be disappointing.