By the time you read this article, the “Mad Cow” fiasco will have cleared the market. However, there are several lessons to learn. The first lesson is that “like a thief in the night” the market can take away relatively high prices or give relatively high prices.

On December 22 before the announcement that a dairy cow in Washington had “Mad Cow” disease, the Kansas City Board of Trade (KCBT) March wheat contract closed at $3.89. On Dec. 23, the March contract price closes at $3.75, down about 14 cents. Prices fell another five cents on the Dec. 24.

Within two days of the announcement of “Mad Cow” disease, cash wheat prices had fallen 19 cents. The second lesson is to watch the basis along with futures prices.

Cash prices fell 19 cents because of lower wheat futures market contact prices. Cash prices are a function of the futures contract prices and the basis. The Texas gulf basis was 58 cents on December 22 and 58 cents on December 26. Thus, while cash prices fell 19 cents, the basis held steady.

Declining futures contract prices implied that speculators were unwilling to buy agricultural commodities until the market reaction to “Mad Cow” was clear. A steady basis implies that commercial (cash) buyers thought that there would be little long-run price impact.

Another lesson is the importance of speculators — people that buy and sell cash commodities and futures contracts for the sole purpose of making money. Speculators “smooth” out the market. They provide a place to sell when no one in the cash market wants wheat and they sell when no one in the cash market wants to sell. Speculators take risk when merchandisers do not want to.

Wheat prices fell between December 22 and December 26 because speculators quit buying wheat futures contracts. Speculators make money by taking price risk. If risks get too high, speculators get out of the market until things settle down.

The wheat market is a world market and is an efficient market. The odds are that the “Mad Cow” disease problem will only have a short-run impact on wheat prices. Buyers of U.S. wheat will try to use “Mad Cow” as leverage to get lower prices

Before Dec. 22, wheat prices appeared to have “peaked” and were showing signs of weakness. The KCBT March contract peaked on December 3 at $4.11. March contract prices appeared to have established a trading range between $3.80 and $4.

In mid-January if KCBT March wheat contract prices are above $4 than wheat prices should continue the upward trend. Mid-January March contract prices below $3.80 imply that prices will have established a downtrend that will probably last into harvest.

Exports and 2004 U.S. winter wheat production will determine if wheat prices go up or down. Both world and U.S. wheat stocks are tight. Thus, the wheat market is depending on an average or better U.S. winter wheat crop.

If weather conditions in the winter wheat belt are not favorable to wheat production, wheat prices will increase. Favorable weather conditions should result in lower prices.

Elevators in central Oklahoma and the Texas Panhandle are offering about 40 cents less than the KCBT July wheat contract for 2004 harvest delivered wheat. A KCBT July wheat contract price of $3.60 implies a $3.20 forward contract price.

A KCBT July $3.20 put option contract may be purchased for about 10 cents per bushel or $500 per 5,000-bushel contract. This would establish an expected minimum price of about $3.80. If prices are below the loan, the combination of the increased put value and LDP would result in the net price received being above $3.80.