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Faulty expectations result in higher wheat prices

The USDA released the winter wheat seedings, the grain stocks and the supply and demand reports. Wheat prices increased 17 cents, corn prices increased 15 cents and soybeans prices increased 26 cents. Market analysts underestimated winter wheat seeded acres and overestimated grain stocks.

The USDA estimated that winter wheat planted acres are about three percent less than wheat planted acres in 2002. Remember that U.S. winter wheat planted in 2002 was for the 2003/04 wheat-marketing year and that wheat planted acres in the fall of 2003 are for the 2004/05 wheat-marketing year.

The average of market analysts estimates was that winter wheat seedings would be 45.8 million acres compared to 45 million acres for the 2003/04 wheat-marketing year. The USDA estimated that 43.5 million acres have been planted for the 2004/05 wheat-marketing year.

Winter wheat planted acres were expected by market analysts to be two percent higher than last year. The USDA estimated winter wheat planted acres to be three percent less than last year. This was a five percent swing in expectations.

The other surprise USDA estimate was December 1, 2003 grain stocks. Market analysts nailed wheat stocks at 1.51 billion bushels compared to USDA's 1.52 billion bushel estimate. Wheat stocks in December 2002 were 1.32 billion bushels or about 200 million bushels less than wheat stocks on December 1, 2003.

Market analysts estimated December 1, 2003 corn stocks to be 8.2 billion bushels compared to 7.94 billion bushels estimated by the USDA. December 1, 2002 corn stocks were 7.64 billion bushels. The story here is that even though corn stocks are estimated to be 300 million bushels higher than last year, corn prices still increased 14 cents after the report was released.

The USDA estimated December 1, 2003 soybean stocks to be 1.69 billion bushels compared to 1.75 billion bushels, which is the average of the market analysts. On December 1, 2002, soybean stocks were 1.32 billion bushels. Again, bean stocks were higher than last year. The important price point is that the corn and bean stocks estimates released on January 12, 2004 were less than the estimates being used by the market to buy and sell wheat, corn and soybeans.

Another concern is dry conditions in the western section of the U.S. winter wheat belt. Reports indicate that the Texas high plains, western Oklahoma, western Kansas and Colorado are experiencing below average to extreme drought conditions. Dry conditions increase the odds of freeze damage and lower production.

United States wheat-ending stocks are projected to be 559 million bushels compared to a five-year average of 810 million bushels and 491 million bushels last year. World wheat-ending stocks are projected to be 4.68 billion bushels compared to a five-year average of 7.2 billion bushels and 5.6 billion bushels last year.

The 2004 U.S. winter wheat crop is essential to meet the world's needs. The 17-cent wheat price increase on January 12 shows that any reduction in potential 2004 wheat production will have a relatively large price impact.

Producers that are considering pricing 2004 harvested should also take notice. Producers that hedged wheat on the Friday before the report would have a $850 margin call per contract on the day the reports were released. A one-time $850 margin call per contract could be met. However, if dry conditions continue, wheat prices probably will continue to increase.

Producers that forward contracted the Friday before the reports would probably feel bad about not getting the 17 cents. But, at the least, they locked in a price without increased expenses.

Remember that prices can fall as fast as they increase. Last spring's timely rain resulted in record per acre yields under dry conditions. Buying “out-of-the-money” put option contracts could provide inexpensive price insurance.

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