Australia's wheat crop was decimated by drought at planting, late freezes and frost, and too much rain, at least that was what was reported. Now, wheat production is projected by some to be a record 1.16 billion bushels (bb) compared to USDA's 1.04 bb and a five-year average of 930 million bushels (mb). I point this out because this is essentially what happened to wheat production in nearly every major wheat producing country. World wheat production is projected to be a record 27.4 bb and this projection may increase in the December 9 WASDE report.
World wheat ending stocks are projected to be a record 9.2 bb. A better indicator of the world wheat supply and demand situation is the stocks-to-use (ending stocks divided by annual use) ratio which is projected to be 33.8 percent. The stocks-to-use ratio is nearly the same for 2015/16 and the largest since 2001/02's 34.8 percent. The record was in 39.5 percent in 1968/69.
The market is currently offering about 95 cents basis the KC July 17 wheat contract price ($4.32) or $3.37. The last Milling and Baking News reported KC Number 1 wheat basis at 50 cents for 11.2 percent protein, 11.6 percent @ $85 cents, 12 percent @ $1.05, and 12.6 percent at $1.5. There are few reasons for the protein premium to decline between now and the 2017 wheat harvest.
The market is shifting to the KC March contract. Prices broke the $4.18 support price. The next support is at about $4. If the price breaks $4 (I don't think it will although the Australia wheat harvest has to be putting pressure on prices), the next target is $3.80.
As long as the wheat is eligible for an LDP payment and the cash price stays below about $3.15, there is little difference in the net price (cash + LDP). Since the LDP is a five-day average, producers can take advantage of the fact that the LDP lags the cash price by a day or two. Note that storage and interest is about five cents per bushel per month. It doesn't cost much to store wheat and wait for higher prices.
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."