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$2.60 June 2005 wheat prices may be too pessimistic

At this writing, the market is offering about $2.88 for wheat delivered next June in central Oklahoma and the Texas panhandle. This was calculated by subtracting a minus 40-cent basis from the Kansas City Board of Trade July wheat contract price ($3.28).

Using the minus 40-cent basis and given that KCBT wheat contract prices tend to trade in 20-cent ranges, KCBT July wheat contract prices are expected to trade between $3.00 and $3.20 during June 2005. This implies cash prices between $2.60 and $2.80 per bushel.

This price outlook may be too pessimistic. June 2005 wheat prices will depend on U.S and world wheat ending stocks, the potential size of the U.S. winter wheat crop, the conditions of the U.S. spring wheat and foreign wheat crops and the condition of the U.S. corn crop.

Price factors that imply the $2.60 price prediction may be too low are wheat stocks, nitrogen prices, wheat planted acres and the relatively low value of the dollar.

On Jan. 12, 2005, the USDA released the 2005/06 U.S. winter wheat seedings estimate. At this writing, I do not know the estimate. However, I predict that U.S. winter wheat planted acres will be less than last year's 43.35 million acres.

The five-year average seedings (planted acres) are 43 million acres and the 10-year average is 45.9 million acres. A seedings estimate less than 43 million acres will support wheat prices.

It takes about two pounds of nitrogen to produce one bushel of wheat. Relatively high nitrogen prices and relatively low wheat prices may limit top dressing applications. Insufficient nitrogen could affect wheat yields and protein quality.

Wheat producers around the world react to wheat and nitrogen prices in the same way. Relatively low wheat prices and relatively high nitrogen prices also may lower foreign wheat production.

Before the January 12 USDA supply and demand estimates were released, U.S. wheat ending stocks were estimated to be 553 million bushels compared to 547 million bushels last year and a five-year average of 730 million bushels.

World wheat ending stocks were projected to be 5.2 billion bushels compared to 4.8 billion bushels last year and a five-year average of 6.7 billion bushels. This implies that both world and U.S. wheat stocks are relatively tight and a below average 2005/06 wheat crop could result in above average wheat prices.

Factors that support a $2.60 June 2005 wheat price are foreign-planted wheat acres, low corn prices and higher transportation costs. Some analysts predict increased wheat plantings in China, and Eastern European and Former Soviet Union countries.

The 11.7 billion bushel U.S. and 27.4 billion bushel world corn crops may result in U.S. corn ending stocks increasing from 958 million bushels to 1.8 billion bushels. Corn prices are projected to decline from a 2003/04 marketing year average of $2.42 to a 2004/05 marketing year average of $1.90. Relative low corn prices tend to restrict wheat prices.

Relatively high fuel costs and shipping risk in the Middle East have dramatically increased transportation costs. European, Eastern European and former Soviet Union countries have a transportation advantage to some U.S. wheat markets.

U. S. and foreign wheat production is dependent on planted acres and nitrogen use. However, the major determinant of production will be weather. Good weather normally results in above average yields and poor weather normally results in below average yields.

Above average yields and the $2.60 prediction will be “right on.” Below average yields and a price prediction of $3.20 may be appropriate. Right now, 2005/06 U.S. and foreign winter wheat crops are in good shape and a pessimistic $2.60 prediction is in order.

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