Since May 21, the Kansas City Board of Trade December wheat contract has increased from about $5 to about 8.50 ($3.50). The increase from $5 to $6 was due to rain delaying the U.S. winter wheat harvest and reducing quantity and quality.

The price increase from $6 to $7 was due to problems in harvesting the foreign wheat crop in the Northern Hemisphere. The price increase from $7 to $8.50 was due to the drought in Australia, which lowered wheat production expectations from about 850 million bushels to between 570 million bushels and 770 million bushels. USDA's September estimate was 770 million and Australia's recent estimate was 570 million bushels.

It is interesting to note that a relatively small decrease in the U.S. and world's wheat ending stocks resulted in the $3.50 price increase. In the May 2007 USDA wheat world supply and demand estimates, 2007-2008 marketing year U.S. wheat ending stocks were estimated to be 469 million bushels and world wheat ending stocks were estimated to be 4.174 billion bushels. In the September USDA estimates, U.S. ending stocks were 362 million bushels (-107 million bushels) and world wheat ending stocks were 4.137 billion bushels (-37 million bushels).

A 37 million bushel change in world wheat ending stocks is less than a 1 percent change in ending stocks. Note that the major importers (Brazil, China, Middle East, North Africa, Pakistan, and Southeast Asia) expected an ending stocks increase of 199 million bushels.

The ending stocks estimate for the major exporters (Argentina, Australia, Canada, EU-27, and the U.S.) declined 126 million bushels. Wheat sellers have a lot less wheat to sell. Price increases are mostly supply driven.

Since May, USDA's world wheat use estimate has declined from 23.23 billion bushels to 22.79 billion bushels, a 440 billion bushel reduction in demand. Relatively high wheat prices could result is a further reduction in demand.

Argentina and Australia are the keys to wheat prices. The benchmarks to watch are 514 million bushels for Argentina and 570 million bushels for Australia. Since prices are supply driven, small changes in expected production will have a relatively large impact on prices.

Wheat stocks are tight and wheat prices are relatively high and volatile. Producers must remember that with $3.50 wheat, 35 cents is a 10 percent move. With $8 wheat, a 10 percent move is 80 cents.

At this writing, the KCBT December wheat contract is $8.34 and is trading in a range between $8 and $8.50. To break the long-run uptrend, the December contract price must close below $7.50. The most likely scenario is for the December contract price to establish a sideways pattern between $8 and $8.50.

The KCBT July 2008 wheat contract price has broken out of the $5.50 to $5.80 sideways pattern that was established last June.

Relatively dry topsoil conditions in parts of Oklahoma and Kansas have resulted in below average plantings. Agronomists say that yields are not affected unless wheat has not been planted by mid-October in central Oklahoma and late October in southern Kansas.

Wheat may be forward contracted for 53 cents below the KCBT July 2008 wheat contract ($6.20 - $0.53 = $5.67 at this writing).

The current cash market price in central Oklahoma is about $7.65 and about $7.60 in the Texas Panhandle. A below-average 2008 U.S. winter wheat crop could result in June 2008 prices at this level.

An above-average 2008 U.S. winter wheat crop could result in the KCBT July contract price falling to $5.40 and wheat prices in the $5 range.