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Conditions place June wheat near $3 average

At this writing, the Kansas City Board of Trade July 2006 wheat contract price is $3.53. Using the five-year average basis of a minus 40 cents for central Oklahoma and the Texas panhandle, the market is predicting a June 2006 cash price of $3.13. Cash price during June 2006 may be between $2.65 and $3.65.

During the last five years, Oklahoma and Texas Panhandle harvest prices have averaged about $3.01 and the range in average June prices was from $2.42 to $3.47. Current supply and demand conditions imply that June 2006 wheat prices may be near the $3 average.

A lot can happen, and usually does, during the six months between now and June 2006. First, Argentine and Australian will harvest their 2005 wheat. And, second the 2006 U.S. winter wheat crop has just been planted. Argentine and Australian wheat production will impact world wheat stocks and the 2006 U.S. winter wheat crop will be the first wheat crop harvested for the 2006/07 marketing year.

Both world and U.S. wheat stocks are below average and relatively tight. World wheat stocks on May 31, 2006, are projected to be 5.05 billion bushels compared to a five-year average of 5.6 billion bushels.

More important than wheat stocks is the stocks-to-use ratio (amount of wheat used divided by ending stocks). The world wheat stocks-to-use ratio is projected to be 22.2 percent compared to a five-year average of 28.9 percent. My records go back to 1960 and the world wheat stocks-to-use ratio has not been this low.

United States wheat stocks are projected to be 530 million bushels compared to a five-year average of 650 million bushels. The U.S. wheat stocks-to-use ratio is projected to be 24.2 percent compared to a five-year average of 29 percent. For the last three years, the U.S. stocks-to-use ratio has been between 23.2 and 27.6 percent. With a stocks-to-use ratio of 24.5 percent, the average price during June 2005 was $3.05.

Relatively low world and U.S. wheat stocks are not enough to result in June 2006 wheat prices being above $3. It will take a below-average 2006 winter wheat crop.

Early estimates are for slightly higher 2006/07 U.S. winter wheat planted acres. Hard red winter wheat acres are expected to be slightly higher than last year and soft red winter wheat acres are expected significantly higher. However, winter wheat planted estimates must be compared to both an average as well as to last year.

For the 2005 wheat crop, HRW wheat seeded acres were one percent less than in 2004 and Oklahoma and Texas acres were significantly lower. Soft red winter wheat planted acres were 19 percent less than in 2004. When the USDA releases the “Winter Wheat Seedings” in January, the estimates should be compared to a five-year average as well as last year's seedings.

Hard red winter wheat seeded acres for the 2005 crop were 29.9 million acres compared to a five-year average of 30.5 million acres. Soft red winter seeded acres for 2005 were 6.1 million compared to 8.1 million acres for 2004 and a five-year average of 7.9 million acres.

The U.S. winter wheat crop is essentially planted and was planted in significantly better conditions than the seedings for the 2005 crop.

Relatively high fuel and fertilizer costs will impact wheat production worldwide. Most producers will have a tendency to apply less fertilizer and not plant marginal acres. This could lead to lower production and higher prices in 2006.

Wheat stocks are relatively tight, which implies that any problems, perceived or real, will have a relatively large impact on wheat prices. This “weather market” may offer opportunities to price wheat before the 2006 harvest.

The keys are to compare actual wheat seedings to the benchmarks and to watch the KCBT July 2006 wheat contract price for opportunities. The market often presents the opportunity to buy put or call option contracts cheaper in January than in April or May.

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