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U.S. wheat prices refusing to drop

Just when I give up on wheat prices, they rally. Cash prices had fallen from about $3.85 on Jan. 2 to $3.40 in mid-March. The Kansas City Board of Trade July wheat contract price had fallen from $4 to nearly $3.73 and the basis had fallen from a minus 13 cents to a minus 30 cents (17-cent decline).

A producer wanted to know what to do with 20,000 bushels and I said, “Sell it.” During the next four days, the cash price increased about 30 cents. The KCBT July wheat contract price went from a short-run downtrend to re-establishing the uptrend that started last October. The July contract must close above $4 two consecutive days to completely re-establish the uptrend.

Trade analysts indicate that wheat price increases are partially due to increased soybean and corn demand. Some analysts are predicting that soybean prices may reach $12 from the current Chicago Board of Trade May contract price of about $10. Higher soybean and corn prices will continue to have a positive impact on wheat prices.

Stocks tight

United States and world wheat, corn, and soybean stocks are tight. When stocks are tight, market prices are volatile. Little changes in production or use expectations will continue to have a relatively large impact on prices. Volatile prices should continue through the foreign wheat harvest this fall and possibly until the 2005 U.S. wheat harvest.

Wheat stocks are tight, but adequate. World wheat production is projected to be 8 percent higher than last year. For the 2004/05 wheat-marketing year, world wheat production is projected to be 22.1 billion bushels and consumption is projected to be 21.6 billion bushels. This implies that world wheat ending stocks may increase 500 million to 600 million bushels during the 2004/05 marketing year.

During the 2004/05 wheat marketing-year, U.S. and world wheat stocks are expected to remain well below average. Thus, wheat prices are expected to average about $3.40 in the 2004/05 marketing-year.

Two things could change this price expectation. The most important expectation is that world wheat production be above 21.6 billion bushels. Lower production and world wheat stocks would decline for the sixth year in a row and wheat prices would average significantly higher than the expected $3.40.

Marketing rules

From a market planning perspective, there are two rules. First, do not fight the market. No one knows how high prices will go nor when (the date) the peak price will occur. Second, the best way to deal with price volatility is to have a written marketing plan.

When developing the plan, consider potential price patterns for the 2004/05 marketing-year and what will cause patterns to change. Consider several production scenarios. First, production is as expected. In this case, wheat prices will probably peak in June and possibly near current price levels. The expected foreign wheat crop would result in lower U.S. wheat exports and higher stocks.

Second, U.S. wheat production is lower than expected and foreign wheat production is as expected. Wheat prices will increase into the July/August period and then decline.

Third, both U.S. and foreign wheat production is less than expected. Depending on how much lower than current expectations, wheat prices could reach $5 or higher before Argentina and Australia's wheat harvest.

More scenarios may be developed to evaluate potential price movements. Developing the scenarios will help identify market signals and make marketing decisions quicker and more efficient.

Given the uncertainty in the market, this may be the year to spread price risk by selling wheat at harvest and then throughout the remainder of the fall and winter.

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