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Will the market offer $6 for June 2007 wheat?

I conducted a meeting for producers in Abilene, Texas, and Leo Holloway wanted me to guarantee $6 wheat. I told the group that, guaranteed, they would have the opportunity to sell wheat for $6. I did not tell them when.

Given the current wheat and corn supply and demand situations, there appears to be about a 5 percent chance that Holloway will have the opportunity to sell wheat for $6 this year. About a 50-cent downside wheat price risk exists and maybe a $1.25 upside potential. At this writing, the market is offering (using a minus 40-cent basis) $4.66 for harvest delivered wheat.

Elevators may be taking about 13 cents protection for harvest forward contract offers. In central to northern Oklahoma and the Texas panhandle, elevators are offering harvest forward contracts for about 40 cents less (minus 60 cents in the Abilene area) than the Kansas City Board of Trade (KCBT) July wheat contract price. The five-year average June basis is a minus 28 cents and the average basis during June 2006 was a minus 27 cents.

June basis same

The June 2007 wheat basis should be about the same as last year. If feed lots or feed mills buy wheat from elevators, they must pay a handling charge (about 20 cents) and hauling charges (10-15 cents). Buying wheat directly from producers at harvest eliminates the handling charge and some of the hauling costs for feedlots and mills. Thus, feed demand for wheat at harvest is expected to result in an average to above average basis.

At this writing, the KCBT July wheat contract price is $5.06. Using a minus 27-cent basis and the KCBT July contract, the potential cash price range is between $4.29 ($5.06 - $0.27 basis - $0.50 price decline) and $6.04 ($5.06 - $0.27 basis + $1.25).

Given that Holloway is facing a potential minus 47-cent basis, the Abilene area potential price range is between $4.09 ($5.06 - $0.47 basis - $0.50 price decline) and $5.84 ($5.06 - $.47 + $1.25 price gain). Holloway has about a 5 percent chance of receiving $6 for his wheat at harvest. He has about a 10 percent chance of receiving $4.10 or less.

The harvest price will depend on the size of the hard red winter wheat crop, the number of corn acres, and the condition of the corn crop. If not for very tight corn stocks and the fact that 2007 corn production must be at least 1.8 billion bushels more than 2006 corn production, 2007 wheat harvest prices would be about $3.60. Demand for wheat as feed is expected to result in wheat prices staying above $4 and maybe above $5.

Keys to watch are corn planted acres, corn planting conditions, condition of the 2007 corn crop, and the size of the 2007 winter wheat crop. The USDA will release the summer crop planted acre estimates on March 30. Corn planted acres need to be about 91 million. Doane's Agriculture has estimated corn planted acres at about 90 million acres.

Corn planting conditions will not be known until the April/June time period. Agronomists indicate the corn planting needs to be completed by the end of June.

Crop good condition

United States winter wheat production is expected to be about 1.6 billion bushels. Except for a small area in north-central Oklahoma, the hard red winter wheat crop is in mostly good to excellent condition.

Relatively high wheat and corn prices bring more uncertainty, and depending on how risk is measured, more price risk. Few producers will go broke forward contracting wheat for $4.66. However, a few producers will not chastise themselves if they forward contract wheat for $4.66 and the harvest price is over $5.

What each producer should determine is, “What will hurt the worst, both financially and emotionally: forward contracting for $4.66 and not having the opportunity to sell above $5 or not forward contracting for $4.66 and having to sell at $4.30?”

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