Except for a strip in southern Kansas, drought conditions cover most of the hard red winter wheat area and a substantial portion of the soft red winter wheat area. The drought is expanding into southern Kansas. For Oklahoma, the last 90 days have been the driest on record and this is the sixth driest year on record.
Due mostly to the drought, the Kansas City Board of Trade (KCBT) July'06 wheat contract price has increased from $3.45 to nearly $4. After it rained from 0.3 inches to 0.6 inches in parts of Texas and Oklahoma, the KCBT July wheat contract price fell to $3.95.
The KCBT July wheat contract price represents what merchandisers are offering for harvest delivered wheat. Some elevators in central Oklahoma and the Texas Panhandle are offering 35 cents less than the KCBT July contract price for harvest delivered wheat.
Two reasons the KCBT July wheat contract price fell five cents after the rain are uncertainty about 2006 wheat production and the $4 psychological price barrier.
There is little doubt that the drought has impacted the 2006 wheat crop. There is a lot of doubt about the weather and prices between now and harvest.
The 90-day (February through April) forecast is for the drought to persist, intensify or develop in the hard red winter wheat area. Some improvement is projected for soft red winter wheat areas. If this forecast holds, the KCBT July wheat contract price will remain at or above current levels.
What the market is concerned about is “potential” wheat production. The USDA projects that U.S. winter wheat seeded acres are two percent higher than last year. Hard red winter wheat seeded acres are expected to be 1 percent lower than last year and SRW wheat acres are projected to be 19 percent higher.
In parts of Texas, Oklahoma and southern Kansas, less wheat acres are being grazed than normal. Cattle have been removed from much of the wheat that was being grazed. Thus, there is a higher percentage of wheat to be harvest than normal.
Another factor is that wheat has the ability to recover. Wheat producers report numerous times where it looked like wheat yields were going to be below average. Then timely rains and favorable temperatures resulted in average or above average yields.
Current drought conditions, current wheat conditions and the 90-day weather forecast make an “average” hard red winter wheat crop unlikely. And the market is betting this way.
The average KCBT July wheat contract price is about $3.40. The current price is about 55 cents above this average.
History also shows that there are psychological price barriers and $4 is one of them. On this price rally, the KCBT July wheat contract price increased from $3.74 ¾ to $3.99 ¾ before falling back to $3.95. The July wheat contract price traded between $3.98 and $3.99 ¾ for four days before declining.
If the KCBT July wheat contract price breaks the psychological $4 barrier (closes above $4 for two consecutive days), then bids for 2006 harvested wheat will continue the uptrend.
Prices are, and will continue to be in a “weather market” between now and harvest. When it rains, prices will fall. How far will depend on how much rain and where it rains.
What producers must do is decide how much price risk they are willing to take. Currently, wheat may be forward contracted for about $3.60. Timely rain and favorable temperatures could result in $3.20 June cash wheat prices. Dry, hot weather could result in $4 cash prices.
Strategies include letting the dice roll and taking the June 2006 price or selling some wheat for June 2006 delivery. The decision should be based on whether you can afford to take $3.20 for your wheat.