Drought conditions persist in most of the U.S. hard red winter area and parts of the soft red winter wheat area. Soil moisture conditions have continued to decline.

Extreme drought is reported in southern and eastern Oklahoma and up into southwest Missouri. Abnormally dry conditions have developed throughout Kansas and continue up into Nebraska, South Dakota, Colorado and Montana. Drought and abnormally dry conditions are spreading through Missouri, Iowa and Illinois.

Potential wheat yields in southern Oklahoma and the Texas panhandle have been lowered. If it does not rain in these areas by the third week in March, the entire crop will be at risk.

Reports indicate that, while it is extremely dry in northern Oklahoma and Kansas, potential yield has probably not been affected. However, if moisture is not received by mid-March, potential yield will decline. The general consensus is that a 1-inch rain over the hard red winter wheat area would be a multimillion-dollar rain.

Another problem is green bugs that have been reported over most of Oklahoma and the Texas Panhandle. The biggest problem appears to be in southwest Oklahoma and parts of the Texas Panhandle.

Another factor impacting wheat prices is foreign wheat production expectations. The International Grains Council (IGC) projects 2006 world wheat production to be 21.6 billion bushels, compared to 2005 world wheat production of 22.6 billion bushels. The USDA projects 2005/'06 wheat marketing-year world production to be 22.3 billion bushels.

World wheat ending stocks are projected to be 5.2 billion bushels compared to 5.5 billion bushels last year and a five-year average of 6.3 billion bushels.

World wheat consumption is projected to be 22.9 billion bushels compared to 22.4 billion bushels last year and a five-year average of 21.8 billion bushels. If IGC's 2006/'07 marketing year world wheat production of 21.6 billion bushels is correct, then world wheat stocks will be lower in the 2006/'07 marketing year than they have been during the 2005/'06 marketing year.

If the drought continues, U.S. wheat production is expected to be below 2.1 billion bushels and possibly below 2.0 billion bushels. With total U.S. 2006/'07 wheat use (domestic consumption plus exports) estimated to be 2.14 billion bushels, U.S. wheat stocks would also decline.

Both lower U.S. and world wheat production and stocks indicate higher wheat prices. This is currently reflected in the Kansas City Board of Trade's July wheat contract prices.

At this writing, the KCBT July wheat contract price is $4.50. Local elevators in Oklahoma and the Texas Panhandle are bidding about 35 cents less than the KCBT July wheat contract price for harvest delivered wheat. This implies that wheat may be forward contracted for harvest delivery for about $4.15 per bushel.

Reviewing the U.S. wheat ending stocks relationship to the U.S. average annual wheat price indicates that if U.S. wheat ending stocks are 540 million bushels, the average annual price is about $3.40. United States wheat ending stocks, for 2005/'06, are projected to be 540 million bushels and the average annual price is projected to be $3.40.

If U.S. wheat ending stocks decline 100 million bushels to 440 million bushels, the average annual price is expected to increase to $5.30. This relationship shows how sensitive wheat prices are to wheat stocks.

One thing to remember is that prices tend to peak early in short crop years. With wheat, the caveat is that the foreign wheat crop is mostly harvested in September through October and that a short foreign wheat crop following a short U.S. wheat crop could result in significantly higher wheat prices.

A short U.S. wheat crop followed by an above average foreign wheat crop would result in higher prices at harvest and declining prices throughout the summer and fall.