Corn and soybean futures are trading at remarkable prices, but I want to talk about wheat. I think the current wheat market — particularly hard red spring wheat — is a microcosm of the challenges and possibilities in grain markets today.

On Jan. 16, the Minneapolis March wheat futures contract closed at $11.35/bu. The market traded limit up in 17 of the next 20 trading days, with limits expanding from 30 to 60 to 90¢/bu. on Feb. 14, when the market closed at $18.53/bu. That's a breathtaking move and one for the record books.

What is going on in the wheat market? There are five major wheat exporters in the world: the European Union (EU), Argentina, Australia, Canada and the U.S. In 2007, each of these major exporters faced production challenges: Australia suffered its second straight drought; Argentina, Canada and the EU had disappointing wheat crops and shrinking wheat supplies. Only the U.S., with 3 million more acres than the year before, harvested a wheat crop larger (modestly) than the year before.

When four of five exporters suffer a poor crop, wheat importers must scramble to meet their needs. Many have scrambled to the U.S. where, despite high prices, wheat exports are running at a fast pace. The net result is that by the end of this crop year, U.S. wheat stocks will be at their lowest level in 60 years. Globally, wheat stocks relative to usage are at their lowest level in 30 years.

THE CURRENT WHEAT market shines a spotlight on the fragile nature of all grain and oilseed markets. It shows us just how close we are to the tipping point between strong prices and a jarring sequence of limit-up price moves. Grain stocks are not exactly plentiful in the world of corn and soybeans. I think it helps to remind ourselves that corn is trading at $5/bu. — a price we would not associate with the largest corn crop ever harvested. (Can you say “ethanol?”)

Dare I ask the question: How would these markets react to a disappointing crop? In the last century, the U.S. suffered 15 “short” crops in corn (yields more than 10% below trend). Short crops happen — just look at wheat.

The wheat market is giving us a sobering look of what could be if crop production disappoints. Strap on a seatbelt and keep some antacids nearby. This is no time to relax.

CONSIDER WORST-CASE SCENARIOS

What does this mean for you in the year ahead? Despite the current wheat situation and my short-crop musings, the most likely outcome in any year is a normal crop.

For producers who have started pricing 2008 crops, don't forget your crop insurance — you need it to cover the short-crop scenario. If you have a choice, I strongly suggest you purchase revenue assurance (RA) with the harvest price option and not crop revenue coverage (CRC), which limits the price adjustment at harvest.

Are you looking ahead to 2009? It is hard to ignore $5 corn and $12 soybeans. However, if you lease your land, make certain you will have the land in 2009. Some producers rely on old family arrangements, but this type of market demands more. Before pricing, you should secure a contract on all rented land.

Take a sharp pencil (again) to your production costs. Do you know what higher fertilizer prices will do to breakeven costs in 2009? Do you know how higher seed or fuel costs will affect your bottom line? Grain prices are not the only prices trending higher. Consider worst-case scenarios and look for ways to manage margins.

Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at usset001@umn.edu