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Market Analysis

Friday, May 27, 2016

   The International Grains Council (IGC) raised the world wheat production estimate to 722 million tons (mt) (26.53 million bushels (mb)) compared to USDA's 727 mt (26.71 mb). Earlier in the year the IGC world wheat production estimate was 960 mt (26.1 bb). Production estimates have increased for Argentina, the EU, Russia, Ukraine, and the U.S., among other countries. The USDA projects world wheat ending stocks to be a record 9.46 bb compared to 8.9 bb in 2015/16 and a five-year average of 7.55 bb. The world's stocks-to-use ratio is projected to be 36.1 percent compared to a five-year average of 29.4 percent. 36.1 percent is the highest since 1998's 36.1 percent. The record is 39.5 percent in 1968.

   At this writing, the KC July wheat contract price is near $4.60 and the KC Dec contract is near $4. At 4 cents per month storage and 1 cent interest (5 cents), carry into late November is 30 cents. The market is offering more than carry to store wheat. The downside KC contract price risk is about 30 cents. Basis should improve between now and December. However, it is possible for the basis to decline 30 cents. This implies 90 cents storage risk (30 cents futures, 30 cents basis, and 30 cents storage).

   The KC July wheat contract has price support at $4.40 and resistance at $4.62. KC wheat contract prices are technically on a long-run downtrend. Contract price have been in a short-run sideways pattern between $4.40 and $5 since early August 2015. To break the sideways pattern and the long-run downtrend, KC nearby (July) wheat contract price must break the $5 price resistance level.

   During August 2015, the new crop (2016 harvest) basis had a range of a minus 50 cents to a minus 30 cents. The current (May 18) cash basis and harvest forward contract basis has a range of minus 80 cents to a minus 65 cents. This is a 30 to 35 cent decline in the basis. The lower basis may have been the result of higher expected production and test weight concerns.

Risk Management Strategies

Friday, May 27, 2016

   If wheat prices break the short-run sideways pattern and the long-run downtrend, it would probably not happen before August 2016. In other words, significant prices are not very likely until August/September and, right now, the odds are not very high for higher prices at all. There is about 50 cents downside price risk. If you can afford the 50 cents, consider selling 25 percent of the wheat across the scales, then stagger the remaining over the September through December (February, if taxes are not a problem) time period.

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."