The national average government loan rate for 2004 harvested wheat will be $2.75 compared to $2.80 for the 2003 wheat crop. The 2004/05 wheat marketing-year target price will be raised from $3.86 to $3.92. The direct payment will remain at 52 cents and the maximum counter cyclical payment will increase from 54 cents to 65 cents. The direct and counter cyclical payments are paid on 85 percent of the base acres and yield.

Wheat harvest prices for 2004 are expected to be between $2.50 and $3.50 and the odds are that this $1 range is not wide enough. During harvest, prices will have a tendency to gravitate to the loan rate ($2.75). Prices will depend on 2003/04 marketing year ending stocks, 2004 wheat production and potential wheat use.

The Kansas City Board of Trade July 2004 wheat contact price is $3.30. The 10-year average central Oklahoma and Texas Panhandle basis is about a minus 35 cents. This implies that the market is offering about $2.95 for 2004 hard red winter wheat. Wheat may be forward priced or hedged for 2004 delivery for about 20 cents per bushel above the loan rate.

During the last five years, world wheat use averaged 21.5 billion bushels per year and the range has been between 21.3 and 21.9 billion bushels. Wheat use in the U.S. averaged 1.27 billion bushels and another billion bushels were exported for a total U.S. average use of 2.27 billion bushels per year.

World stocks

World wheat ending stocks for the 2003/04 marketing year (June 1 through May 31) are projected to be 4.7 billion bushels or about 22 percent of annual use. During the last five years, world wheat ending stocks as a percent of annual use has averaged 33 percent. World wheat ending stocks have declined from 7.6 billion bushels in May 1999 to a projected 4.7 billion bushels in May 2004.

United States 2003/04 marketing year wheat ending stocks are projected to be 643 million bushels compared to a five-year average of 810 million bushels. May 31, 2003 wheat ending stocks were 492 million bushels.

During the last five years, world wheat production averaged 21.3 billion bushels and the range was between 20.1 billion bushels in 2004/04 and 21.7 billion bushels in 1998/99. World wheat consumption averaged 21.5 billion bushels and ranged between 21.2 and 21.9 billion bushels.

U.S. stocks gain

For the following, assume that U.S. consumption is the average (2.27 billion bushels) and world consumption is the average (21.5 billion bushels). If 2004 U.S. wheat production is average (2.13 billion bushels) and world wheat production is projected to be average (21.33 billion bushels), U.S. wheat ending stocks would be expected to decline 140 million bushels to 502 million bushels and the harvest price would be expected to be $3.10.

If 2004 U.S. production is 2.6 billion bushels (the highest in the last five years), ending stocks would be expected to increase to 972 million bushels and the harvest price would be near $2.50.

Average world wheat production (21.33) would result in lower world ending stocks and would support U.S. wheat prices. The point is that the supply situation next harvest will impact wheat prices and stocks will be tight enough that a below average U.S. and world wheat crop could cause wheat prices to dramatically increase.

If producers sell the KCBT July wheat contract and something happens to reduce U.S. and/or world wheat production, wheat prices could increase $1 or more resulting in margin calls. For prices to fall to $2.50 and stay low, world and U.S. wheat production must be above the five-year averages.