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Will wheat prices return to $3.40?

With significantly higher U.S. wheat stocks, wheat prices are averaging about $3.30 higher than during the 2003 through 2005 wheat marketing years. Even with higher prices, U.S. winter wheat farmers may lose money from producing wheat in 2009.

During the 2003-04, 2004-05 and 2005-06 wheat marketing years, U.S. wheat ending stocks ranged from 540 to 571 million bushels. World wheat ending stocks ranged from 4.9 to 5.5 billion bushels. U.S. average annual wheat price ranged from $3.40 and $3.42.

For the 2008-09 wheat marketing year, U.S. wheat ending stocks are predicted to be 655 million bushels and world ending stocks are predicted to be 5.5 billion bushels. The 2008-09 average annual wheat price is projected to be $6.70.

With 2008-09 wheat marketing year U.S. ending stocks about 100 million bushels higher and the world wheat stock about equal to the 2003-04 through 2005-06 marketing year ending stocks, wheat prices are expected to average about $3.30 higher. Wheat prices may have moved to a higher plateau.

Another signal that wheat prices have moved to a higher plateau is the market price offer for June 2009 wheat. At this writing, the KCBT July wheat contract price is $6.30. Elevators are offering between minus $1.10 to a minus $0.75 (mostly minus $0.85) basis the KCBT July wheat contract price for June delivered wheat.

Oklahoma/Texas elevators are offering between $5.20 and $5.55 for 2009 harvest delivered wheat. With lower stocks, the June 2004 price averaged $3.47, the June 2005 price averaged $3.05 and the 2006 June price averaged $4.48.

One difference between the 2009-10 wheat crop and the 2003, 2004 and 2005 wheat crops is costs of production. The USDA estimated the average 2003 and 2004 wheat variable costs of production in the Great Plains to be about $60 per acre. Estimates for the 2009 wheat crop are near $160 per acre.

When the 2009 wheat crop was planted, anhydrous (82-0-0) was $980 per ton, urea (46-0-0) was $900 and DAP (18-46-0) was $1,150. Diesel was near $4 per gallon. Anhydrous is now about $450 and DAP about $500 per ton. The 2010 wheat crop may cost less to produce than the 2009 wheat crop.

Over time, costs are a major determinant of wheat prices. The market will provide wheat farmers a competitive return to investment. Over time, the price of wheat will be sufficient to cover costs plus a profit.

If costs remain high, the wheat price will remain high. If costs are relatively low, wheat prices will be relatively low.

Farmers allocate the scarce resources — land, labor, capital and management — to the production of commodities with the highest profit potential. If the price of wheat is high relative to costs, farmers will produce wheat until excess supply causes prices to fall. If the price of wheat is low relative to costs, farmers will produce another crop besides wheat and wheat supplies will decline.

The point is that wheat farmers, within limits, should not be concerned with prices. Prices will take care of themselves. Profit will depend on farmers keeping their costs of production lower than the average farmer’s costs.

The 2009-10 wheat marketing year may be a lean profit year for wheat farmers. The odds are that the 2010-11 marketing year will be much better. And without significantly lower costs, wheat price will not return to the $3.40 level.

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