The KC Dec wheat contract, currently at $4.08, continues to trade in the $3.95 to $4.25 price range. Most Oklahoma elevators raised the basis five cents (a five cent improvement in cash price). With the basis near a minus $1.20, a nickel isn't much but it is a positive signal in a dismal market.
Last week's Wheat Stocks report indicated that wheat stocks were higher than the trade expected. Wheat exports continue to be relatively strong with hard red winter wheat export sales 95 percent above last year and all wheat export sales 27 percent higher. With massive stocks, there does not appear to be any reason for wheat to break out of the current trading range.
Current wheat prices may be $2 below variable cost of production. The market is signaling wheat producers that stocks, therefore production, must be reduced. However, the market has to provide a price that will promote producers to produce a quality product. These two market objectives may be accomplished by keeping wheat prices relatively low during planting season and then raising prices while producers have time to add sufficient fertilizer to maintain quality. If this logic is correct, price will stay near current levels until maybe mid-November and then increase into the February time period.
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."