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Market Analysis

Friday, July 18, 2014

   Most of the week of July 14, the KC September wheat contract price challenged the $6.36 support price. Near the close on Thursday, the Sept contract price peaked at $6.58 and closed at $6.49. There is price resistance at about $6.68. On Friday, July 18, the KC Sept contract price declined to the $6.32 and closed at $6.34 below the support level. I predicted that the KC HRW wheat contract price had established a bottom. Friday's close may indicate otherwise. If Monday's close is below $6.30 then the next target price is $6.

   The dilemma is that the supply of U.S. hard red winter (HRW) wheat is limited. However, the HRW tight stocks situation may be offset by above average U.S. hard red spring, soft red winter, and foreign wheat stocks. Another problem with Kansas, Oklahoma, and Texas HRW wheat is that the average protein level is near 14 percent, which may be too high for bread flour.

   Some countries import U.S. hard red winter wheat and blend U.S. wheat with poorer quality wheat. Relatively high protein levels of U.S. wheat imply less imported wheat will be needed to raise the protein level of the poor quality wheat. The result could be reduced export demand. If protein levels of competing wheat export countries are relatively low, the export demand for U.S. HRW wheat could be relatively high. It is a "wait and see" situation.

   The world wheat supply and demand situation is tending toward excess wheat. The world's 2014/15 marketing-year wheat harvest is between 50 and 60 percent complete. Current projections indicate that foreign wheat production will be the second highest on record and that the increase in foreign wheat stocks could more than offset tight U.S. HRW wheat stocks.

Risk Management Strategies

Friday, July 18, 2014

   If you have a written marketing plan, follow it. If not, consider storing wheat until the October/November time period. I put the price risk at 45 cents plus about 20 cents storage. An alternative is to sell wheat and buy "near-the-money" Dec or March Call option contracts. The KC Dec call provides price protection until November 20 and the March call provides price protection until Feb 20. If you haven't sold any wheat, consider selling in one-third to one-fourth lots between now and Jan 1.

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."