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Market Analysis

Friday, June 29, 2018

   Since June 12, the market has taken about $1 off cash prices. The $1 decline has essentially been the result of declining KC July wheat futures contract prices. On May 25, the KC July contract closed at $5.64. With a minus 25 cent basis, the cash price was $5.39. Cash wheat prices peaked on June 12 at $5.78 with the KC July contact at $5.53 and the basis at a positive 25 cents. Reports indicated the $5.78 was about $1 above the world export wheat price which may have stimulated the $1 decline in cash price.

   The protein premium continues to hold. The 50 cent increase in the basis may be the result of 59 pound plus test weight and 12 percent plus protein wheat. Note that wheat may be forward contracted for 2019 delivery in Dacoma, Oklahoma for the KC July 2019 wheat contract price ($5.40) and a minus 45 cent basis ($4.95 cash). Note: the KC July 2019 wheat contract price ($5.40) is 81 cents higher than the July 2018 wheat contract price ($4.59). The result is a June 2019 price of $4.95 compared to a June 2018 price of $4.84.

   Dry conditions in Russia and Australia are reported to have reduced wheat production expectations. Russia’s 2019 wheat production is projected to be 2.5 billion bushels (bb) compared to 3.1 bb in 2017. Australia’s production is projected to be 880 million bushels (mb) compared to 790 in 2017 and a five-year average of 940 mb. Total wheat production by the major hard wheat exporting countries is projected to be about the same in 2018 as in 2017.

Risk Management Strategies

Friday, June 29, 2018

   With a positive 25-cent basis (July), the market is telling producers to sell wheat now. KC futures contract prices are telling producers to store wheat until later in the year. The July basis may be 50 cents above normal. With 42 cents carry in the futures contracts, producers would be 8 cents ahead to sell wheat now and buy the KC Dec futures contract.

   Strategies include selling all wheat now (strong basis). Another strategy is selling the wheat on a basis contract (note that a 20-cent basis on the July '18 contract is a minus 19-cent basis on the KC Dec contract) and pricing it sometime in the future based on changes in the KC Dec contract price. This stops storage cost but the net price received will depend on the KC Dec contract going up or down.

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."