Wheat prices kept falling and falling. Then in one day, prices increased six cents per bushel. The downtrend was broken and some optimism was back in the market.

From a technical viewpoint, it is important that the KCBT July wheat contract price remains above $3.30. The next critical price level for the July contract is $3.50.

From a fundamental (supply and demand) perspective, several points need to be made. First is that world wheat ending stocks are below average and U.S. wheat ending stocks are above average. Overall, wheat stocks are relatively tight. Tight stocks should result in volatile prices between now and harvest. Above average U.S stocks will temper some of the volatility.

Stocks expected to decline

The second point is that most market analysts predict that wheat stocks will decline during the 2001/02 wheat-marketing year. A Canadian Wheat Board analyst predicted that world 2001/02 wheat production would be 20.9 billion bushels and an Australian analyst predicted that world 2001/02 wheat production would be 21.7 billion bushels. The five-year average is 21.4 billion bushels.

While the analysts disagreed on production, both agreed that 2001/2002 world wheat ending stocks will fall below 3.9 billion bushels. This would be the lowest world wheat ending stocks since 1975. World wheat ending stocks at or below 3.9 billion bushels should result in U.S. wheat prices going above $3.50 per bushel.

The market is now concentrating on the U.S. winter wheat crop. Coupled with lower planted acres, 2001 winter wheat production is expected to be less than last year's 1.6 billion bushels.

USDA wheat crop condition reports indicate that the wheat crops in Nebraska, Kansas, Oklahoma and Texas are in poorer condition than last year. What these crops need is warm, dry weather.

Production questions

Important unknown information that will impact prices includes how much winter wheat will be produced in the U.S. and how many acres of spring wheat will be planted. Spring wheat production has the potential to offset reduced winter wheat production. Foreign wheat production must also be put in the price equation.

United States winter wheat production will not be known until early July. Spring wheat planted acres will be known by May and spring wheat production will not be known until September.

Foreign wheat production will not be known until sometime in September. This means that wheat prices will remain relatively uncertain until late September 2001.

Price projections

Wheat prices are expected to be at or above current levels in June 2001. This means that the KCBT July wheat contract price is expected to be $3.35 or higher and the CBOT July wheat contract price is expected to be above $2.90.

The KCBT July wheat futures put option contract is offering an opportunity to set a minimum price above the loan rate. By buying a KCBT $3.20 July wheat put option contract, the net wheat price received would increase if the cash price goes below the loan rate.

For example, a KCBT 320 wheat put option contract may be bought for eight cents per bushel ($400/5,000 bushel contract). If the basis were minus 40 cents, the minimum price would be $2.72 per bushel.

If the cash price falls to $2.50 with a $2.60 loan and a minus 40-cent basis, the net price received would be $2.82. The wheat would be sold for $2.50. A 10-cent loan deficiency payment could be obtained. And the $3.20 put would be sold for 22 cents profit.

If price continued to decline, both the LDP and the put option would gain in value. If cash prices were below the loan rate, two cents would be gained for each one-cent decline in the cash price. And the net price received would increase one cent for each one-cent decline in cash price below the loan.