At the time of this writing, July '06 Chicago Board of Trade (CBOT) wheat futures closed at $3.95 per bushel — not a bad price when looking at July contract prices over the past five years. Many private analysts have encouraged producers to go ahead and forward price 25 to 35 percent of their expected 2006 production. Historic prices and seasonal price tendency seem to support that strategy.
Going back to the July 2002 contract, wheat futures have traded in a range of $2.65 (in 2002) to $4.30 (in 2004). The 2002 July contract never surpassed $3.60 and the 2003 contract high was $3.80. The 2004 contract traded above $4.00, but for only 24 days. The 2005 and 2006 contracts have traded up to $4.00, but have never closed at that level.
Given the price range seen over the past five years, July futures are currently trading in the top 25 percent of recent price levels.
What are some other factors to consider in marketing the 2006 wheat crop? Two key factors to consider include the growing conditions of the hard red winter (HRW) crop and seasonal price movement.
The wheat futures contract traded at the CBOT is typically viewed as a soft red winter (SRW) wheat contract since the designated delivery points are located in the traditional SRW growing area. But the CBOT wheat contract also allows the delivery of hard red winter (HRW) and two subclasses of spring wheat — dark northern spring and northern spring wheat. This essentially allows the CBOT wheat contract to reflect market price changes in perhaps more than 80 percent of the wheat produced in the United States.
Recent crop progress reports confirm that U.S. HRW wheat conditions continued to decline in February due to dry weather across the top producing states. The top U.S. wheat producing state, Kansas, had only 27 percent of its crop rated good/excellent at the end of February, down from 52 percent at the end of January.
The Oklahoma HRW crop was in critical condition, with only 4 percent rated good and 70 percent rated poor/very poor at the end of February. There was virtually no precipitation in the major wheat producing areas of Oklahoma during February, according to the Oklahoma Agricultural Statistics Service.
The Texas crop remained in very bad shape with conditions rated 87 percent poor/very poor as of March 5.
Australia and Argentina are examples of major winter wheat production areas in the Southern Hemisphere. Their growing season is roughly six months out of sync with the Northern Hemisphere. Thus, winter wheat crops are planted in the May and June, with harvest being from November to January. This production cycle difference is partly responsible for seasonal price tendency in the wheat market.
Normally, U.S. winter wheat prices are lowest during the harvest months of June and July when domestic supplies are largest. As these supplies dwindle and export sales pick up, prices often move higher into the fall months. However, toward the last quarter of the calendar year, the approach of the Southern Hemisphere harvest tends to limit foreign purchases of U.S. wheat and U.S. prices have historically peaked by January or February.
In recent years, this peak has occurred more often at the end of February and around mid-March.
If significant amounts of Southern Hemisphere wheat are available, foreign buying interest shifts away from the United States. As a result, prices trend lower through April and May and into harvest.
As noted earlier, dry conditions have adversely impacted a significant amount of HRW acreage and prices have responded accordingly. Though it may be too late to boost yield significantly, a period of rain in key production areas could send prices lower. Current wheat prices are attractive and forward contracting or short hedging a portion of production should be considered.
Scott Stiles, Rob Hogan and Kelly Bryant are University of Arkansas Extension economists. Comments or questions? Call 870-460-1091 or e-mail [email protected].