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Market Analysis

Friday, October 2, 2015

   The KC December wheat contract price finally closed above $5 for two consecutive days. This indicates that a short-run uptrend has been established and that the price target is $5.20 and possibly $5.30. The long-run downtrend that was established in May 2014 is still in play. To break the LR downtrend, the KC Dec contract price must close above $5.75.

   To reestablish the downtrend, prices must close below $4.66. Prices haven't been below $4.66 since June 2010. The next support below $4.66 is $4.53. Closes below $4.53 indicate the possibility of $4.33, which was the low price in April 2007.

   The price strength may be due to lower expected production and wheat quality in Australia. Relatively low prices and projected returns for wheat may result in a lower percentage of harvested acres next June. Wheat acres may be grazed out and/or converted to summer crops. Canola acres are projected to be significantly lower than last year, which could result in an increase in wheat planted acres.

   It is difficult to get too optimistic about wheat prices. World wheat production (26.9 billion bushels (bb)) is projected to be the third record year in a row. World wheat ending stocks are now projected to be 8.3 bb, which is a record. The five-year average is 7.2 bb. The world ending stocks-to-use ratio is projected to be 31.6 percent compared to the five-year average of 28.5. This 31.6 percent is the highest since 2001's 34.8 percent.

Risk Management Strategies

Friday, October 2, 2015

   Consider selling a designated portion of wheat on each rally. Another strategy is to set price and target dates to sell wheat in lots. For example, all wheat will be sold by December 31. The plan has the first 20 percent to be sold by September 30 or $4.50, whichever happens first. Cash prices hit $4.54 on Sept 14 so the first lot was sold. The second 20 percent lot was scheduled to be sold for $4.75 or Oct 15, whichever one happened first. When the wheat is sold, the date and price to sell the next 20 percent will be set.

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."