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Little room for error in wheat market

Recently on a Friday, a producer with 10,000 bushels of wheat in storage wanted to know if prices were going to go up or down. Supply and demand conditions and price signals were little help in giving him advice. I told him that if I had to take a position, I would sell and that the odds were 45 percent up and 55 percent down.

The next Monday, Kansas City Board of Trade May wheat contract prices and cash prices increased 11 cents. Calls to market analysts did not produce a “concrete” reason for the 11-cent rally. The market was unchanged on Tuesday and down on Wednesday.

It turned out that China bought about 12 million bushels that Friday and another 3.7 million bushels on Monday. China has quietly bought about 48 million bushels of wheat since last June.

The moral to this story is that wheat prices are very sensitive to small changes in supply and demand conditions. However, it should be noted that the 11-cent wheat price increase occurred in one day's trade and then settled down to trade in the established sideways pattern.

Current cash wheat prices (old crop prices) are based on the KCBT May contract prices and 2004 harvested wheat forward contract prices are based on the KCBT July wheat contract prices. Since last November, May contract prices have traded in a sideways pattern between $3.80 and $4.10. Since January 1, KCBT July wheat contract prices have traded between $3.80 and $4.

China's purchase and the 11-cent price increase did not cause either contract price to break out of the price range. It takes two consecutive price closes above or below the upper or lower bounds to break the sideways pattern and to establish an up or down trend.

Merchandisers appear to be watching the U.S. winter wheat crop progress and China's wheat and grain situation. United States winter wheat planted acres are four percent less than last year.

Currently, moisture is average or above average for central Oklahoma and Kansas. Soil moisture conditions are below average in western and northern sections of the winter wheat belt. If it does not rain in these areas, the U.S. winter wheat crop will be less than currently expected and prices will probably increase.

Chinese wheat production has declined from 4.2 billion bushels in 1999 to 3.2 billion bushels in 2003. During the same period, Chinese wheat consumption has declined from 4.05 billion bushels to 3.84 billion bushels.

China's wheat ending stocks have declined from 3.8 billion in 1999 to 1.5 billion bushels in 2003. To maintain wheat stocks, China needs to import about 600 million bushels of wheat per year.

During the 2003/04 wheat-marketing year, China has purchased about 48.1 million bushels for delivery before May 31, 2004 and another 42 million bushels to be delivered after June 1. China has also purchased about 36 million bushels from Australia and about 18 million bushels from Canada.

Current wheat conditions imply that 2004/05 wheat marketing year prices will be higher than the projected $3.25 2003/04 average prices. The KCBT July wheat contract price is $3.95. Some Oklahoma and Texas panhandle elevators are offering from $0.30 to $0.35 less than the KCBT July wheat contract price for harvest delivered wheat. Thus, wheat may be forward contracted for $3.60 to $3.65.

If the world wheat crop is less than 20.5 billion bushels, $5 wheat next October would be highly probable. To maintain wheat prices at current levels, world wheat production needs to be 21.6 billion bushels. Current expectations are for a 22.1 billion bushels world wheat crop.

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