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Market Analysis

Tuesday, August 13, 2019

   After the release of the August 12 WASDE, Dacoma, Oklahoma cash wheat prices fell to $3.68. Cash prices and the KC Wheat (hard red winter (HRW)) contract prices were down 29 cents for the day. This 29- cent price decrease may be due to a 36 million bushel (mb) increase in U.S. HRW wheat production, and a 25 mb increase in Other Spring wheat production combined with the corn production estimate being 13.9 billion bushels (bb) compared to the prerelease trade estimate of 13.2 mb. The final "nail in the coffin" for Oklahoma's wheat price may be the fact that average protein for 2019 HRW harvested wheat is about 11.3 percent when the market wants 12.5 percent protein wheat. Black Sea area wheat (Russia, Ukraine, and Kazakhstan) protein is expected to average above 12.5 percent.

   During the time period June 1 through August 12 this year, Burlington Oklahoma wheat prices averaged $4.28. During the same period last year, Burlington wheat prices averaged $5.24. Oklahoma wheat producers that harvested wheat this year averaged 40 bushels per acre, compared to 28 bushels per acre last year. Using Burlington's average harvest price and 40 bushels per acre, the income per acre is $171.00 compared to $147.00 last year. A 110 mb wheat crop at $4.28 has a value of $470 million (110 mb x $4.28) compared to 70 mb last year with a value of $366 million (70 mb x $5.24). It could be said that yield is more important than protein.

   Oklahoma's 2019 harvested wheat averaged about 11.3 percent protein. In the Kansas City wheat market, 12.6 percent protein wheat has a 55 cent higher basis (price) than 11.3 percent wheat. At 40 bushels per acre, protein would add $22 per acre increasing the gross return per acre to $193.00.

   Black Sea wheat production is projected to be 4.23 bb compared to 4.067 bb last year. By exporting wheat during the 2018/19 wheat marketing year, Black Sea countries depleted beginning stocks from 575 mb to 393 mb ending stocks. Higher 2019 wheat production will offset the lower stocks, and 2019/20 Black Sea exports are expected to remain at 2.2 bb. The bottom line is that world hard wheat stocks will be about the same as last year. The difference is relatively low U.S. HRW wheat protein, which implies lower U.S. HRW wheat prices.

Risk Management Strategies

Tuesday, August 13, 2019

   Much of the wheat in Oklahoma elevators may need to go to the feed market. A relatively large corn crop will keep pressure on Oklahoma wheat prices and the corn harvest has not started. Not much carry is present in the market (the September/December spread is 19 cents), and the basis remains relatively strong. Nine out of the last 11 years, wheat should have been sold before September 1. Producers should consider staggering wheat into the market; 410 KC December call options can be bought for about 20 cents. March 420 calls are about 25 cents. Producers should consider stopping storage costs by selling wheat and buying calls.

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."