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Market Analysis

Friday, June 15, 2018

   Technically, the KC Sept contract is still in an uptrend but appears to be running out of steam. The KC Sept contract price bottomed out at $3.94 on Dec 11. Drawing a line alone the bottoms of a daily chart since Dec 11 shows that the Sept contract price touched the trend line at $5.18 on June 15. Two consecutive closes below $5.18 would imply that the uptrend will have been broken.

   The big news is 20 to 25 cent basis at many Oklahoma country elevators and the protein premiums. On June 15, 2017 the wheat basis at Burlington, Oklahoma was a minus 84 cents. The basis difference ($1.05) shows the value of protein. Some analysts predict that the protein premium will not last much longer. Oklahoma wheat prices are reported to be well above Black Sea wheat prices. To sell Oklahoma wheat on the export market, either Oklahoma prices must decline or Black Sea prices increase.

   The USDA survey indicated that Oklahoma wheat producers planted 4.3 million acres of wheat and will harvest 2 million acres. The average yield per harvested acre is projected to be 26 bushels. Using a cash price of $5.40, the average total return per acre would be $140. In most cases, the average total return is insufficient to cover variable cost of production.

   The KC July wheat futures contract price has a 15-cent carry between now and September and a 39-cent carry between now and December.

Risk Management Strategies

Friday, June 15, 2018

   With a positive 20-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 39 cents carry in the futures contracts, producers would be 11 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.

   Another strategy is selling wheat and buying an "at the money" KC Dec call, which will cost about 36 cents per bushel. This implies that this strategy would cost a total of 75 cents (39-cent spread between KC July and KC Dec and 36 cents for the premium).

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."