If you sell your wheat, prices will increase. If you store your wheat, prices will fall. No matter what you do, it may be the wrong decision because, in reality, no one knows whether wheat prices will trend up or down.
The 2001/02 wheat marketing-year price trend will depend on whether the U.S. wheat crop is above or below 2 billion bushels and whether the foreign wheat crop is above or below 19 billion bushels.
U.S. wheat production consists of two harvests — winter wheat and spring wheat. The winter wheat harvest started in late May and will be finished in July. The spring wheat harvest will start in July and should be finished in August.
The U.S. winter wheat crop is the first harvest in the world's 2001/02 marketing year and normally makes up about 8 percent of world wheat production. Total U.S. wheat production (winter plus spring wheat) normally makes up about 11 percent of the world's wheat production.
Because of reduced 2001 U.S. wheat production, winter wheat is projected to make up 6.5 percent and total U.S. wheat production is projected to make up 9.3 percent of world wheat production. This implies that less than 6.5 percent of wheat production information is currently available for price prediction.
Because U.S. wheat production is expected to be less than 10 percent, foreign wheat production will be the major detriment of the wheat price trend.
Analysts project that world wheat production will be 21 billion bushels compared to last year's 21.3 billion and a five-year average of 21.7 billion bushels. Last year production was about 400 million bushels below average and resulted in world wheat ending stocks declining about 320 million bushels.
World wheat demand for the 2001/02 wheat-marketing year is projected to be 21.7 billion bushels compared to 21.0 production. This implies that world wheat stocks may decline another 600 million bushels. U.S. ending stocks may decline 200 million to 300 million bushels. Lower stocks result in higher prices.
The “joker” to predicting prices is wheat production, and we will not know production until harvest is complete and the wheat is in the bin.
Several market signals are being sent. First, the Kansas City Board of Trade (KCBT) December wheat contract price is 20 cents higher than the KCBT July wheat contract price. The Chicago Board of Trade (CBT) December wheat contract price is 25 cents higher than the CBT July wheat contract price.
The normal basis increase between July and November is 16 cents per bushel. Adding the normal basis increase to the 20-cent July/December price spread implies that November cash wheat prices should be 36 cents per bushel higher in November.
One problem is that the current basis is about 10 cents above average. There is a chance that the basis will not increase 16 cents between now and November.
The market is signaling that it wants to buy wheat now. One market strategy that normally fits a strong (above average) basis is to sell the wheat and buy December call option contracts. Selling wheat stops about 5.5 cents per bushel storage and interest costs and puts the money in your bank account. Buying an “at the money” KCBT December call option contract allows you to take advantage of any futures price increase.
Several variations of this strategy normally works in the current market situation. One is to sell all the wheat and buy call option contracts to cover one-half to two-thirds of the wheat. There are other combinations of selling wheat and buying call options to cover the sales that work well.
Producers who store wheat on the farm may want to maintain ownership of farm-stored wheat, sell wheat that would be in commercial elevators, and buy call options to cover the sales.
Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail: Anderso@okstate.edu.