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Market Analysis

Friday, July 24, 2015

   On July 1, the KC Sept wheat contract price closed at $5.925. On July 24 (18 trading days), the Sept contract price challenged the $5.06 support price. It the Sept price closes below $5.06 two consecutive days, the next target price is $4.90. Closes below $4.90 would imply a target price of $4.55. To break the downtrend, the Sept contract price has to close above $5.30 two consecutive days. If the Tuesday, July 28th close is above $5.10, the next price target is $5.20 and maybe $5.30.

   It should be noted that at some local elevators, the basis strengthened 5 cents. In some elevators there was no change. And in some elevators, the basis declined 10 cents. The basis change may reflect the wheat quality in the elevator.

   For the 2015/16 wheat marketing year (June through May), world wheat production is projected to be 26.53 billion bushels (bb) compared to last year's record 26.67 bb. World wheat ending stocks are projected to be a record 8.1 billion bushels (bb) compared to last year's 7.4 bb. The world wheat stocks-to-use ratio is projected to be 30.8 percent. This is the second highest ratio to 2009/10's 31.0 percent. The U.S. wheat stocks-to-use ratio is projected to be 38.5 percent compared to 37.7 percent last year. The record in recent years is 48.4 percent in 2009/10.

   Since June 1, the central Oklahoma wheat price has average $5.10. The 2015/16 wheat marketing year is shaping up to look a lot like the 2009/10 wheat marketing year without the $6 price on June 1. In 2009/10, Oklahoma wheat prices averaged $4.89. On June 1, 2009, the price was $6.64(5.08 - June 1 2015) and the price was $5.13 on July 1 ($5.54 -2015). By September 1, 2009, the price had declined to $4.17 and traded between $3.77 and $4.80 the remainder of the marketing year. Unless something happens to the U.S. spring wheat crop or foreign wheat production, Oklahoma cash wheat prices may be destined to stay in the $4.00 to $5 range.

Risk Management Strategies

Friday, July 24, 2015

   Consider selling a designated portion of wheat on each rally. Analysis of the last 29 years shows that there is little difference between strategies that include selling all wheat at harvest; selling all wheat in October, November, or December; selling wheat in thirds June, Sept/Oct, and Nov/Dec; or selling all wheat at harvest and buying KC Dec call option contracts to cover the bushels sold. Strategies that haven't worked well include establishing a storage hedge. This may be the year to sell in one-third lots - harvest, Sept/Oct, and Nov/Dec.

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."