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Market Analysis

Friday, February 22, 2019

   During the last three weeks, wheat prices declined 62 cents and gained back 7 cents. The price decline may be the result of lower export demand than expected. In the February 8 WASDE, the USDA projected hard red winter (HRW) exports to be 320 million bushels (mb) compared to 371 mb last year. Another factor is that Egypt bought U.S. soft red winter (SRW) wheat rather than U.S. HRW wheat.

   The USDA released 2019/20 wheat supply and demand estimates. Wheat production (2019) was projected to be 1.902 billion bushels (bb) compared to 1.884 bb in 2018. (My HRW 2019 production estimate is 684 mb compared to 662 last year). 2019/20 wheat marketing year ending stocks were projected to be 944 mb compared to 1.01 bb from 2018/19. The average annual price for the 2018/19 marketing year is projected to be $5.15. The 2019/20 average annual price is projected to be $5.20.

   The USDA projections imply that 2019/20 wheat marketing year prices will be about the same as prices during the 2018/19 wheat marketing year. The caveat is quality. If milling quality is relatively low, wheat prices will be significantly lower than last year. Prices may hold up during the June/July time period, but when the foreign wheat crop (Black Sea area) hits the export market in August and September, the U.S. wheat price will change. The direction will depend on foreign wheat quality and quantity.

   2019/20 world wheat production may be slightly higher than 2018/19 wheat production. Higher production is projected in Russia, Australia and the EU. With slightly higher wheat use, world wheat ending stocks may not change much.

Risk Management Strategies

Friday, February 22, 2019

   Wheat may be forward contracted for $4.60 (-15 cent basis) in northern Oklahoma and $4.40 (-35 cent basis) in southern Oklahoma. If world hard wheat exportable stocks are tight during the U.S. HRW wheat harvest and the HRW harvested wheat is 12.5 percent protein with 60 pound test weight, the basis may be 20 cents higher. This may be a sign to hold off forward contracting wheat.

Kim's Soap Box: Is there a way to "beat the system?"

   Date updated: Friday, April 10, 2009 (archives)

   There just has to be a way to know when to sell wheat and when to store it. In reviewing some old files, I found a one-page guide on how to determine which marketing strategy to use at harvest. The strategies included sell cash, hedge, store, and option strategies. The signals were if the basis and/or the KCBT Dec futures price were above or below normal. I collected cash prices, basis and futures prices from 1970 to present and evaluated the signals. The result was that the basis is a relatively good indicator if a storage hedge will work. The futures price was useless as a signal.

   The research is not complete, but my expected conclusion has been published by Carl Zulauf (Ohio State University) and Scott Irwin (University of Illinois), "With few exceptions, the field crop producers who survive will be those who have the lowest cost of production because efforts to improve revenue through better marketing of the commodity produced will meet with limited success over time."..."A good marketing program starts with a good program for managing and controlling the cost of production."