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Market Analysis

Friday, March 27, 2015

   On March 5, the KC July wheat contract price closed at $5.24. On Monday, March 23, the contract price peaked at $5.84 and closed at $5.80. Friday, March 27, the close was $5.58, sixty cents up and twenty-two cents down. A question is what caused the price rally and price decline? Normal suspects are fund purchases and sales, changes in the dollar relative to other currencies (dollar index), and 2015 wheat production expectations. Export demand could play a limited role.

   On March 5, the fund position for wheat was estimated to be 45,200 contracts net short. By March 23, funds were about 52,500 short, and by March 25, the funds were short about 60,300 contracts. Note that the funds were selling into the market during the $5.24 to $5.80 price move and also selling into the $5.80 to $5.54 price move (selling on the way up and on the way down). There were a few days where the funds were net buyers.

   On March 5, the dollar index was 96.96. The dollar index peaked at 100.04 on March 16 (36 cents of the 64-cent move), declined to 97.3 by March 23 (24 cents of the 60-cent move), and closed at 97.59 on March 27. The difference in March 5 and 27 was less than one point.

   Fund positions and the value of the U.S. dollar relative to other currencies (dollar index) affect wheat prices but the relationship is difficult to determine in the short-run. Recent price movements were probably the result of changes in yield and production expectations (weather). Hard red winter wheat stocks are relatively tight and (to a limited degree) have created a weather market. Weather markets result in volatile and unpredictable prices.

Risk Management Strategies

Friday, March 27, 2015

   If you have wheat in storage, take advantage of any price rally. June 2015 Oklahoma cash wheat prices are expected to be near $5. If the market offers a harvest price wheat above the cost of production, you may want to take advantage of it with a limited amount of wheat.

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."