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Wheat supply situation supports above average harvest prices

During June, the central Oklahoma and Texas panhandle wheat price averages about $3.10 per bushel. At this writing, wheat may be forward contracted for June delivery in central Oklahoma or the Texas Panhandle for about $3.40 per bushel. The forward contract price was calculated by subtracting a 35-cents basis from the KCBT July wheat futures contract price.

The KCBT July wheat contract price is the market’s best estimate of Kansas City cash wheat prices in July 2006. Based on expected July supply and demand conditions and estimates of the 2006 winter wheat crop, traders, analysts and merchandisers buy and sell wheat contracts for July delivery. The result is a KCBT July wheat contract price that the market believes will be too high 50 percent of the time and too low 50 percent of the time for wheat delivered in July. As expectations change, the July contract price changes.

Tight wheat stocks and drought conditions are supporting wheat prices. United States’ wheat ending stocks are projected to be 542 million bushels compared to 540 million bushels in 2004/05, 546 million bushels in 2003/’04 and 491 million bushels in 2002/03. The five-year average is 650 million bushels.

World wheat ending stocks are projected to be 5.3 billion bushels compared to 5.5 billion bushels last year and 4.9 billion bushels for the 2003/’04 marketing year. The five-year average is 6.3 billion bushels.

Below average wheat stocks make U.S. winter wheat seeded acres and spring growing conditions more important than if there were above average stocks.

The USDA estimated that winter wheat planted acres are two percent higher than last year. Soft red winter wheat seeded acres were 7.3 million, up 19 percent from last year. Due to wet planting conditions 2004/’05 SRW wheat seeded acres were below average.

Hard red winter wheat seeded acres are projected to be 30.7 million acres, 1 percent less than last year. Kansas seeded acres are estimated to be 10.2 million acres, 2 percent higher than last year. Oklahoma planted acres are projected to be 2 percent higher and Texas seeded acres are projected to be 5 percent higher, both at 5.8 million acres.

Drought conditions have the potential to reduce wheat yields. The drought may have positive impacts. Fertilizer suppliers and applicators indicate that fall fertilizer applications were about 20 percent less than last year. Lower fertilizer could result in lower yields.

Drought conditions have limited wheat foliage growth and the amount of fertilizer used by the wheat plant. This leaves more nutrients available for grain production. Also, moisture movement through the soil has not removed nutrients.

Long-term weather forecast projects continued drought conditions in Oklahoma and southern Kansas. Normal temperatures and moisture are projected during April and May. Since soil moisture is already low, only time will tell if there is sufficient moisture to produce average yields or higher.

Long-term weather, like price, is almost impossible to predict. What can be predicted relatively accurately is the price range. Current supply and crop conditions indicate a most likely price of $3.40. Timely rains and favorable temperatures could result in higher than expected yields and the June price being in the $3 range.

Dry and hot conditions during spring could result in below average yields and the June price being in the $3.80 range. Weather will determine whether prices are lower or higher than expected.

What you must ask is, “Which will hurt me worse? Having to sell wheat for less than $3.40 or not having the opportunity to sell wheat above $3.40.” If you cannot afford a price lower than $3.40, forward contract some wheat for June delivery.

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