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Tight stocks make volatile market

Kansas City Board of Trade (KCBT) wheat contact price movements provide evidence that wheat stocks are tight and that merchandisers are concerned about supply. Tight stocks and concerned merchandisers imply that prices will remain volatile. In volatile markets, a sure way to lose is to try to “out-smart” the market.

From May 1 to May 15, the KCBT July contract price increased from $2.96 to $3.50. Then, on May 19, the July wheat contract price fell 15 cents per bushel. During the last few days, the contract price has traded between $3.35 and $3.45l.

The critical price levels for the KCBT July contract are $3.40 and $3.60. Prices are moving in 20 cent increments. Two consecutive closes below $3.40 imply a $3.20 target price. Two consecutive closes above $3.60 imply a $3.80 target price.

In volatile markets, one marketing plan is to sell a specified wheat percentage irrespective of what the market is doing. “Staggering” wheat into the market on specified dates is the same as “dollar cost averaging.”

Your average price will not be the high price or the low price.

Another marketing method that has worked well for some producers is to set price targets. After the price targets are set, the producer either places sell orders at the elevator or watches the market closely. When the price reaches the target, the wheat is sold.

Target prices may be set at different levels with a specified percentage of the crop sold at each price. Given that current cash prices are above the loan rate, target prices may be set to sell wheat at both higher and lower prices.

Anticipating price movements just before, during and shortly after the U.S. winter wheat harvest are difficult at best. The main reason is that the U.S. winter wheat crop is only about 7.5 percent of world wheat production.

Total U.S. wheat production is only about 10 percent of the world's production.

Most foreign production is harvested during the August through September time period. Argentina and Australia's wheat harvest is mostly during November and December and is about 7.1 percent of the world wheat crop.

Current market factors indicate that the odds favor lower prices rather than higher prices. Factors driving prices are U.S. and foreign wheat production, U.S. corn production and a lower value of the dollar relative to foreign currencies.

United States wheat production is projected to be about 2.1 billion bushels. Two months ago, U.S. wheat production was projected to be between 2.2 and 2.3 billion bushels. United States winter wheat production is projected to be 1.6 billion bushels.

Lower-than-expected U.S. wheat production and slightly higher projected 2003/04 marketing year wheat exports resulted in projected ending stocks of 511 million bushels. Two months ago, some market analysts were projecting 2003/04 ending stocks to be 600 to 650 million bushels.

Foreign wheat production is projected to be 18.8 billion bushels and world production is projected to be 20.9 billion bushels. Both estimates are lower than earlier expected.

Another important market projection is 2003/04 world wheat ending stocks of 4.9 billion bushels. Without China's 1.6 billion bushels of ending wheat stocks, world ending stocks would be 3.3 billion bushels. This is nearly equal to world ending stock minus China's during the 1995/96 marketing year when wheat prices reached $7.

Wheat production and stocks will not be known until the harvest is nearly complete sometime in early September. Three points: first, the wheat price trend is normally set in late August and early September. Second, if something happens to substantially lower world wheat production, wheat prices could reach $5.

Third, the odds are that wheat prices will not reach $5.

Given the potential for higher wheat prices, this may be the year to sell wheat in one-thirds, June, October and November or to sell all the wheat at harvest and buy December wheat call option contracts.

Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail [email protected].

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