Kansas City Board of trade July wheat contract price fell below $3 per bushel. This indicated that KCBT July contract prices would likely fall to $2.80. At this writing, the price has held between $2.95 and $3.

Lack of rain and potential lower world wheat stocks are the main reasons prices have not continued to fall.

In late April, wheat industry leaders toured and surveyed some states' wheat crops. Oklahoma's wheat production was projected to be 173 million bushels (98 million bushels last year), and Kansas's wheat production was projected to be 364 million bushels (297 million bushels last year).

At this writing, some market analysts predict that U.S. wheat production will be about 2.2 billion bushels. With wheat use projected to be 2.1 billion, U.S. wheat ending stocks are expected to increase during the 2003/04 wheat-marketing year.

Before the crop tours, weather conditions were favorable for wheat development. There was adequate moisture (some areas were getting dry) and cool temperatures. Since the tours, temperatures have been above normal and the wind has been 20 miles per hour and higher. If it does not rain in the Great Plains, 2003/04 wheat production may not be more than projected U.S. consumption.

The International Grains Council (IGC) projected the 2003/04-world wheat crop to be 21.7 billion bushels compared to 20.8 billion bushels last year. IGC projected larger crops in the United States, Canada, Argentina and Australia. Significantly lower production was projected in Russia and Ukraine and slightly lower in China, India and the European Union.

World 2002/03 wheat ending stocks are projected to be 6.2 billion bushels compared to 7.3 billion bushels for 2001/02. This implies that the IGC projects total world wheat supply to be 27.9 billion bushels compared to 28.1 billion bushels last year.

The IGC projected world wheat consumption to be 22.1 billion bushels. This implies that world wheat ending stocks will decline from about 6.2 billion bushels to 5.8 billion bushels.

Expectations are for world foreign stocks to decline about 400 million bushels and U.S. stocks to increase 100 million to 150 million bushels. One problem is that lower ending stocks are expected in importing countries and higher ending stocks are expected in the major exporting countries.

Here are some thoughts. First, the U.S. winter wheat crop is only about 7.4 percent of the world wheat crop. Total U.S. 2003 wheat production is projected to be about 10 percent of world wheat production. Foreign wheat production will have a major impact on U.S. wheat prices.

Second, between now and when the U.S. winter wheat crop is harvested in northern Oklahoma and southern Kansas, hot dry winds could significantly lower production. Temperature and rain are the keys.

A 100 million to 150 million-bushel reduction in U.S. wheat production or slightly higher exports in 2003/04 would result in about 500 million bushel ending stocks and $3.50 prices.

Third, world wheat stocks are projected to decline for the sixth year in a row. Lower world stocks and low U.S. ending stocks imply that lower-than-expected foreign wheat production could result in higher U.S. wheat exports and higher wheat prices.

Fourth, cash prices for 2003-harvested wheat are already below the loan rate. This means that for wheat eligible for the loan, there is no downside price risk. The loan deficiency payment will make up the difference between the cash price and the loan.

The stage is set for higher prices. However, higher prices require lower production than currently expected. Weather is the key and who knows what the weather will do.

A strategy is to watch the KCBT December $3.30 call option contract premium. If the premium gets below 10 cents (it's about 16 cents now), consider selling the wheat and buying the KCBT $3.30 call option contract.

Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail Anderso@okstate.edu