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Wheat prices expected to peak early

Selecting when the “best” time to sell wheat is like rolling dice. The highest odds are for rolling a seven (six out of 36 chances or 17 percent). The odds of being wrong are 30 out of 36 (83 percent). There is a saying: “The victory does not always go to the strongest or the fastest, but that is the way to bet.”

It is the same with marketing. Long-term marketing success usually happens when you make decisions that are normally right and avoid decisions that are normally wrong. A review of “short” crop production years may help determine the marketing strategy that has the highest odds of working.

A review of wheat production shows that U.S. wheat production was well below the seven-year average in marketing years 1986/87 through 1989/90. These years should be tempered with the fact that the 1986 farm bill resulted in the USDA reducing wheat-ending stocks from 1.8 billion bushels in 1986/87 to 1.3 billion bushels in 1987/88, 702 million bushels in 1988/89 and 536 million bushels in 1989/90.

Foreign wheat production during the 1986/87 through 1989/90 marketing years was above average and increasing. The impact of below-average wheat production was not reflected in prices until the 1988/89 marketing year when U.S. wheat ending stocks were 702 billion bushels.

United States wheat production was also significantly below average in the 1995/96 and 1996/97 marketing years and the 2001/02 and 2002/03 marketing years. Foreign wheat production was about average in the 1995/96 and 1996/97 marketing years and below average for the 2001/02 and 2002/03 marketing years.

Relevant short crop years are 1988/89, 1989/90, 1995/96, 1996/97, 2001/02 and 2002/03. It is interesting to note that significantly short crop production occurred in two-year increments. And it should be noted that foreign wheat production may have a larger impact now than in the late 1980s.

During the 1986/87 and 1987/88 wheat marketing years, the U.S. wheat price averaged $2.42 per bushel and $2.57 per bushel. After the below-average 1988 crop and followed by the short 1989 wheat crop, the average U.S. wheat price was $3.72 for both 1988/89 and 1989/90.

June 1988 wheat prices averaged $3.37, had increased to an average of $3.94 in December and peaked at $4.07 in March. Of interest is that the major price increase was completed by October. The best marketing strategy was to sell wheat in October.

The June 1989 average price was $3.85. The December average was $3.79 and prices have fallen to $3.40 by May 1990. Price peaked and the best time to sell was at harvest.

June 1995 wheat prices averaged $3.84, reached an average of $4.72 by October, $4.88 in December and peaked at a monthly average of $5.75 in May 1996. The price increase in the spring of 1996 was caused by an expected second short wheat crop in a row.

The average June 2001 wheat price was $2.82 and this was the high price for the marketing year. While the U.S. wheat crop was below average, the foreign wheat crop was above average and offset the short U.S. wheat crop. Wheat prices peaked and the best time to sell was in June.

In 2002, U.S. wheat production was the lowest in over 30 years and the foreign wheat crop was below average. The June 2002 wheat price averaged $2.82 and, fueled by a short foreign wheat crop that was harvested in September through October, increased to an average October price of $4.51. By May 2003, the average monthly price had fallen to $3.09.

The 2006/07 U.S. wheat crop is following slightly below-average 2003 and 2004 wheat crops. Since both world and U.S. wheat stocks are relatively tight and wheat prices are already relatively high, the odds are that wheat prices will peak at harvest.

A lot rides on foreign wheat production. Early estimates are for average foreign wheat production and slightly lower wheat stocks in both the U.S. and world. This supports U.S. wheat prices peaking early.

If foreign wheat production is below average, especially Argentina and Australia, wheat prices would be expected to peak in the October to December time period.

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