Both U.S. and world 2012/13 wheat marketing-year ending stocks are projected to be above five-year averages.

Even with above average projected ending stocks, wheat prices gained nearly $1 on rumors and best guesses.

United States 2012/13 wheat ending stocks are projected to be 735 million bushels compared to 768 million bushels in 2011/12 and a five-year average of 714 million bushels. World 2012/13 wheat ending stocks are projected to be 6.9 billion bushels compared to a five-year average of 6.5 billion bushels.

With higher wheat production and consumption, the ending stocks projection doesn’t provide as strong a price indicator as it did 10 or even five years ago. A better price indicator is the stocks-to-use ratio, which is ending stocks divided by use and converted to a percentage.

The U.S. 2012/13 wheat marketing-year stocks-to-use ratio is projected to be 30.7 percent compared to a five-year average of 32.2 percent. The world 2012/13 wheat marketing year stocks-to-use ratio is projected to be 27.4 percent compared to a five-year average of 27.1 percent. The U.S. wheat stocks-to-use is below the five-year average and the world stocks-to-use ratio is near the five-year average.

The stocks-to-use ratios indicate that U.S. and world stocks are sufficiently tight that any decline in 2012/13 wheat production may have a significant price impact. The recent four-day 90 cent wheat price rally supports this statement.

Global production estimates lowered

Market analysts have lowered both U.S. and world wheat production estimates from USDA May WASDE projections. The wheat harvests in Oklahoma and Kansas indicate that USDA’s May production estimates may be too high. Some analysts report that soft red winter wheat production will be lower than previously expected.

The International Grains Council reduced the estimate for world wheat production to 24.7 billion bushels. This is 200 million bushels less than USDA’s May world wheat production estimate. In the June WASDE report, the USDA is expected to lower its world wheat production estimate to 24.6 billion bushels.

Production estimates for Russia, Ukraine, Kazakhstan, and Australia have been lowered. France, Germany and Poland are all expected to have lower wheat production than last year.

Another reason wheat prices increased is that funds held near record short (sold) futures contract positions. Analysts’ projections indicating lower world wheat production resulted in the funds liquidating the short positions by buying futures contracts. Since there were fewer sellers than buyers, the funds bid up the price until market participants were willing to sell.

There is little reason for funds to sell additional wheat contracts. Facts show that the funds may need to liquidate more short futures contracts.

Kansas City Board of Trade (KCBT) July wheat contract prices are trading in a sideways pattern between about $6.80 (support) and $7.30 (resistance). If the KCBT July wheat contract breaks that $6.80 support, the next price target will be about $6.32. Closes above $7.30 indicate a price target of $7.50.

During the last two years, the KCBT wheat futures contract prices have traded between $4.50 and $9.90. At this writing, the KCBT July wheat contract price is $6.94. This is relatively close to the price range mid-point.

In June 2010 with the price about $4.50, the strategy was either to store wheat into the fall or sell just enough to cover harvest costs and pay some bills and store the remainder for September/October and November/December sales.

In June 2011 when the price was about $9.50, the strategy was to sell one-half to two-thirds at harvest and the remainder in the September/October and November/December time periods.

Given that the current price is near the middle of this range, the strategy to consider is to sell one-third at harvest, one-third in September/October and the remaining third in November/December.