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Market Analysis

Friday, August 19, 2016

   KC wheat contract price may be developing a weak uptrend. The Sept contract price needs to close above $4.40 ($4.30 would be a good signal) and the Dec contract price must close above $4.60 ($4.50 is a good signal). Given record or near record Australian, Canadian, and Russian wheat production and the fourth record world wheat crop (27.3 billion bushels) in a row, the odds of a significant price move is relatively small. The odds that wheat prices have bottomed out are probably about 75 percent.

   Variable costs for 2017 Oklahoma wheat production are estimated to be between $140 and $185 per acre (without a land charge). Using 35 bushels per acre, the break-even price would be between $4 and $5.30 per bushel. With a KC July 17 wheat contract price of $4.75 and a minus 95 cent basis, wheat may be forward contracted for June 2017 delivery for $3.80. A $40 land charge would add $1.15 per bushel to the variable costs.

   There may be 10 million bushels of wheat in bunkers or sacks in Oklahoma alone. With an expected relatively large corn and sorghum harvest, storage space is expected to remain tight. On June 1, 2015, Oklahoma off-farm wheat stocks were 39.5 mb and production in 2015 was 98.8 mb. On June 1, 2016, Oklahoma off-farm wheat stocks were 70.2 mb and 2016 wheat production is projected to be 132 mb. 2016 wheat is significantly better quality than 2015 wheat. But, if 98.8 mb production results in a 31 mb increase in Oklahoma off-farm ending stocks, how much will 132 mb production increase off-farm ending stocks? And how much lower will the price fall?

Risk Management Strategies

Friday, August 19, 2016

   About a 30 cents downside price risk exists. Consider putting wheat in the government loan program (MAL), which will provide nine months to take advantage of higher prices. If higher prices do not materialize, the risk is nine months' storage costs. At four cents per month storage cost and a little interest, that is a total of about a 40 cents price risk.

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."