There is a negative relationship between supply and price. As supplies increase, prices tend to decline. This holds true for most agricultural commodities.

Most of the time if producers have wheat to sell, wheat prices are relatively low. When there is a crop failure and producers do not have much wheat to sell, the price is often relatively high.

The 2002 wheat crop year is a good example. United States wheat production was 1.62 billion bushels. Central Oklahoma and Texas Panhandle wheat prices went from $2.80 on June 1, 2002, to about $4.65 on Oct. 1. Since October, prices have fallen to $3.15.

Supply expectations relative to demand was the driving force behind the price moves. In June, 2002, the USDA was projecting 2002/03 marketing year wheat-ending stocks to be 555 million bushels. The average June Oklahoma and Texas Panhandle price was $2.91.

USDA's 2002/03 wheat ending stocks projection declined from June's 555 million bushels to a 348 million bushels estimate in December. On Nov. 31, 2002, average central Oklahoma and Texas Panhandle wheat prices were about $4.50.

By March, USDA's wheat ending stocks projection had increased to 464 million bushels. Foreign wheat ending stocks projections had also increased.

Commodity analysts project that U.S. wheat planted acres for the 2003 crop will be 63 million acres, compared to 60.36 million last year and a five-year average of 62.5 million acres. The range of the estimates was from 61.8 million to 63.4 million acres. Most estimates were in the 63 million range.

The five-year average U.S. wheat production is 2.15 million bushels. During the last five years, wheat yields have been below the trend line. Planted acres of 63 million are consistent with 2003 production of 2.25 million to 2.3 million bushels.

The Kansas City Board of Trade July wheat contract price broke the $3.20 support level. This implied that the KCBT July contract price would go to $3. To date, the price has held at $3.10.

The expected central Oklahoma and Texas Panhandle basis during June is expected be minus 35 cents. This implies that the average June cash price is expected to be 35 cents less than the KCBT July wheat contract price. A KCBT July wheat contract price of $3.10 implies an average June price of $2.75.

Reports in both the United States and foreign wheat producing countries indicate that planted acres are higher for the 2003/04-wheat crop than were for the 2002/03 crops. Wheat conditions also appear to be better in most countries. This implies that both U.S. and world wheat production will be higher.

Near-the-money KCBT July puts and calls cost about 15 cents per bushel, or about $750 per 5,000-bushel contract.

A KCBT July $3.10 put option contract will provide a minimum price of about $2.60 ($3.10 - $0.35 basis - $0.15 premium). Forward contracting and buying a KCBT July $3.20 call option contact and forward contracting the wheat will result in about the same minimum price.

Given that the average government loan rate in Oklahoma and the Texas Panhandle is about $2.85, setting minimum prices are not a violable alternative for most producers.

Most wheat producers should concentrate on producing wheat with the knowledge that they will get at least $2.85 (cash price plus the loan deficiency payment), and the more wheat they produce per acre, the more money they will probably make.

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