Since early September, the net non-commercial (long minus short contracts for the managed funds) position of Kansas City Board of Trade wheat has declined from 42,445 long (bought) contracts to 4,486 contracts, which is a decline of 37,959 contracts. Managed funds own about 190 million less bushels of KCBT wheat than they did 90 days ago.

Managed funds are holding a record number of short positions in wheat, and the net positions are negative (short) for both corn and soybeans. The good news is that when funds reenter the grain markets prices will increase.

Part of the reason managed funds have liquidated long contract positions may be the increased market risk caused by financial problems in the European Union. Greece and Italy are both in the news because of government debt and unfunded government programs. Spain also has massive debt and unfunded government programs.

German, French, and U.S. banks hold debt positions in these countries. If Greece, Italy and Spain default on the debt, the German, French, and U.S. economies will be affected.

Other reasons for lower wheat prices are higher than expected world wheat supplies and lower corn prices. Since mid-June 2011, corn prices have declined about $1.90. During this period, soft red winter (SRW) wheat prices were supported by corn prices as SRW wheat was sold in the feed market.

Lower than expected corn export demand is one reason for declining corn prices. Other reasons may be that ethanol production may have reached its demand limit, lower cattle numbers may reduce the feed demand, and Australia appears to be harvesting more feed quality wheat than expected.

Australia is expected to harvest a record wheat crop, with two problems. First, excess rain is delaying harvest and may result in a record supply of feed quality wheat. Also, Australia ended the 2010/11 wheat marketing year with a large inventory of feed quality wheat.

The second problem is that the protein level of Australian wheat is expected to be below average. The Australian wheat situation should be positive for wheat prices and negative for corn and feed grain prices. Both U.S. wheat and livestock producers have the potential for more favorable prices.

However, Australia’s wheat quality problems may not lead to higher U.S. wheat prices. Australia’s five-year average wheat production is about 800 million bushels. Australia’s wheat 2011 production is projected to be 160 to 200 million bushels above average. Higher production will offset much of the higher percentage of feed wheat.

The 2011/12 world wheat production is projected to be higher, consumption is projected to be higher, and world wheat ending stocks are projected to be higher than last year.

Some analysts are projecting an increase in world wheat planted acres for 2012/13. With relatively high wheat prices and increased planted acres, 2012/13 wheat production is expected to be 25 billion bushels or higher. World wheat ending stocks are expected to remain at or above current levels for the next two years.

The above circumstances imply that KCBT wheat contract prices may decline into the $5 to $6 range.

Right now, the financial situation in the European Union and the world wheat stocks situation appear negative for wheat prices. Supply and demand situations change unexpectedly and quickly.

High quality milling wheat will always be in demand. The market, if left alone, will guarantee a profit over time. At some point, wheat stocks will decline, and the funds will reenter the commodity markets. Wheat prices will increase.

Producers should concentrate on producing a high quality milling wheat at the lowest cost possible. Then, when prices do increase, producers will have wheat to sell.