The good news is that wheat prices tend to bottom out in August. Additional good news is that the odds of wheat prices below $4 are about 20 percent. The bad news is that U.S. wheat ending stocks are projected to be about 200 million bushels higher than when wheat prices averaged about $3.50.

At this writing, the Kansas City Board of Trade July 2010 wheat contract price is $5.55. Using a minus $0.75 basis, the market is predicting a June 2010 price of $4.80. If the 2010/-2011 wheat crop is above average (2.15 billion bushels), the KCBT July 2010 wheat contract price could decline to $4.25, and June 2010 wheat prices could be near $3.50.

2010 wheat production will depend on how many acres are planted and the weather. For wheat prices to be in the $5 range, 2010 U.S. winter wheat production needs to be less than 1.4 billion bushels, and total wheat production needs to be less than 2.0 billion bushels.

Production may also be reduced by cutting back on fertilizer and other inputs, which could be a big mistake. With excess wheat in the U.S. and the world, flour millers have multiple sources to originate milling quality wheat (U.S. Grade # 2, 12 percent protein or better and max 0.5 percent dockage).

Reports indicate some 2008 low protein, hard red winter wheat may have to be sold for feed. The problem of low milling quality wheat already exists.

If producers attempt to reduce production by cutting back on nitrogen, the odds are that wheat protein will be low. The current spread between corn and wheat indicates at least a $1 discount for feed quality (low protein) wheat and the discount may be as much as $1.50.

The spread is about $1.75 between Chicago Board of Trade corn contract prices and KCBT wheat contract prices. The spread is for feed corn and milling quality wheat.

Reduced inputs increase the odds of dockage and foreign material (FM). Dockage is non-wheat material that may be easily removed with screens and aspirators. Dockage includes weed seeds, chaff, straw, and like materials. Elevators should use a dockage machine (MCI Kicker or Carter-Day) to measure dockage.

Dockage is not a grade factor. Since many contracts limit dockage to 0.5 percent, elevators remove dockage from weight. Discounts are also applied for dockage over 1.0 percent. Cleaning wheat costs, at a minimum, four cents per bushel.

FM is non-wheat material that is about the same size and weight as wheat. Rye is one example of FM.

FM is a grade factor. Over 0.7 percent FM makes a sample “U.S. #3 wheat.” Over 5 percent FM in a sample is “U.S. Sample Grade.” If there is more than 10 percent rye in a sample, the load becomes “mixed grain” and can’t be sold as wheat.

Low prices are telling producers not to plant marginal acres. Wheat producers around the world responded to the relatively high prices during the 2007-20/08 marketing year. Planted wheat acres in the U.S. went from 40.5 million in 2006 to 45 million in 2007 and then to 46.3 million in 2008. All wheat acres went from 57.3 million to 63.8 million.

Planted wheat acres did decline to 59.8 million for the 2009 wheat crop. 2010 wheat planted acres need to be about 57 million. Hard red winter wheat acres need to be less than 30 million.

The market is currently projecting about $4.80 for June 2010 wheat prices. The actual price could be anywhere between $3.50 and $6. The actual price will depend on the acres planted and harvested, weather impacts, and production inputs.

Producers need to put a hard pencil to the planting decision. “If you can’t show a profit with a pencil in the office, the odds are that you can’t produce a profit with a tractor in the field.”

The second thing producers can’t afford is to produce wheat for a $4.80 market and then face discounts for dockage or low quality wheat.

A good philosophy may be, “Use a pencil to assist in the decision, and if you’re going to do it, do it right.” “Do not cut corners or reduce quality.”