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Market Analysis

Friday, August 21, 2015

   Most of Oklahoma's cash wheat prices are based on the KC September wheat contract. The market will soon roll to the KC December contract. At this writing there is a 21.5 cent spread (Dec premium to Sept) between the Sept and Dec contracts. As the market rolls to the KC Dec, the basis will decline equal to the spread between Sept minus Dec. Right now, a minus 50 cent basis would change to a minus 71.5 cent basis. The cash price would not change.

   The KC Dec contract has support at about $4.90 and the Sept contract has support at $4.70. There is strong support at about $4.50 which may be the Sept contract's next price target. This would make the KC Dec's price target $4.70. If Tuesday's, August 25, close is below $4.65, the odds indicate $4.50 will be tested.

   The 2015/16 marketing year price trend may be like the 2009/10 marketing year's trend. Starting in June 2009, world wheat stocks were at near record levels and world wheat production was projected to be the second highest on record. High stocks and near record production resulted in Oklahoma wheat prices being in the $5.50 range. As estimates of world wheat production increased to a new record, wheat prices continued to decline. Prices bottomed out at $3.85 in February.

   Wheat prices didn't develop an uptrend until July 2010 when, with each new estimate, world wheat production expectations were reduced. Wheat prices went from $3.56 in late June to $6.10 on September 1, 2010. Prices hit $7 in December and $8 in January. Unless something happens to reduce wheat production in the southern hemisphere, 2015/16 could be like 2009/10.

Risk Management Strategies

Friday, August 21, 2015

   Consider selling a designated portion of wheat on each rally, setting a date for having all the wheat sold. Then set price and date targets to sell in lots. For example, all wheat will be sold by December 31. The first 20 percent will be sold by September 15 or $4.75, whichever happens first. If the price hits $4.75 before Sept 15, sell the wheat. If the price doesn't hit $4.70 by Sept 15, sell the first 20 percent on Sept 15. When the wheat is sold, set the date and price to sell the next 20 percent.

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."