Between October 2 and November 17, the KCBT December wheat contract price increased from $4.60 to $5.74 (+ $1.14) and Central Oklahoma cash price increased from $3.74 to $4.89 (+ $1.15). Note that there was essentially no change in the basis. Some market analysts contend that the $1.15 price increase was mostly due to "outside investors" (the new term for the index and hedge fund buyers). What producers must figure out is, "Do outside investors have research that indicates that wheat is 'undervalued' or are the outside investors blindly buying wheat futures contracts?"
Facts are that U.S. wheat ending stocks are projected to be 885 million bushels (mb) compared to 657 mb last year and 306 mb for the 2007/08 marketing year. World wheat ending stocks have increased from 4.5 billion bushels (bb) for the 2007/08 marketing year to a projected 6.9 bb for 2009/10. The wheat ending stocks five-year average is 506 mb for the U.S. and 5.2 bb for the world. The five-year average total U.S. wheat use, including exports, is 2.21 bb and total world wheat five-year average use is 22.8 bb.
For U.S. wheat ending stocks to decline to the 5-year average, 2010 wheat production would have to be less than 1.84 bb. The five-year average wheat production is 2.13 bb. The 1.84 bb production estimate was calculated by subtracting 379 mb (885 mb – 506 mb) from the five-year average use (2.21 bb). For world wheat ending stocks to decline to the five-year average (5.24 bb), 2010 world wheat production would need to be less than 21.1 bb. 2009/10 U.S. marketing year wheat production was 2.22 bb and world production was 24.7 bb. To reduce ending stock to the five-year average requires 2010 U.S production be 17 percent less than in 2009 and world production needs to be 14.6 percent less.
The five-year U.S. average wheat price (2005/06 – 2009/10) is about $5. What the market may now be signaling is that the "new" below average wheat price is any price below $5. If this is the case, current Oklahoma cash prices in the $4.60 to $4.80 price range may not be too much out of line. During the last five years, Oklahoma's average annual wheat price has averaged about 9 cents above the U.S. average price. Another question is, "how much above average are 885 mb bushels?" This is what the market is trying to define. Another factor that must be considered is the price of the grain commodities compared to the price of the energies, metals and other commodities. Some believe that grain prices are low relative to energies and metals.
December 1 is less than two weeks away. Research shows that, over time, to sell wheat at or above the market average (after carry), wheat needs to be sold before December 1. If you believe this, you should sell your stored wheat. Now that it is nearly December and if the KCBT March contact price is above $5.75 two consecutive days next week, wheat price may increase about 30 cents above the current level. If this happens, you may want to spread your wheat sales into December.
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."
