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Market Analysis

Friday, July 22, 2016

   I have said it before, and I’ve been wrong, “I think wheat prices are near the bottom.” For the last few years, I’ve said that the Oklahoma cash wheat price floor is near $3.00. Oklahoma cash wheat prices are near $3.00 (mostly $3.04 to $3.17). The current KC September wheat contract has a price floor at about $4.00 and is currently trading at $4.19. The September contract price has been as low as $3.99. Two consecutive closes below $3.99 could signal another 30 cents down. The basis in most elevators has not changed (adjusting for rolling from the KC July contract to the September contract) in the last month and is not expected to go any lower.

   One piece of good news is that the funds are reported to be short about 125,000 wheat contracts (mostly CBT wheat) or about 625 million bushels (mb). Fund traders have effectively sold about 38 percent of the 2016 U.S. winter wheat crop. Profit (positive or negative) will be earned by buying 125,000 contracts. The question is, “when will it happen?” When it does, prices should increase 30 cents or so.

   Three price factors that could result in higher prices are lower world wheat production (supply), lower corn production (wheat for feed demand), and lower value of the U.S. dollar relative to other currencies. By August 1, about 60 percent of the world’s 2016/17 wheat will have been harvested. The 40 percent remaining normally determines the price trend for the wheat marketing year. Right now, production appears to be en route to a new record crop.

   Problems with corn production are not expected. Even a very short corn crop would only add about $1.00 to wheat prices. The dollar value relative to other currencies is not expected to decline very much in the near future and is currently increasing. Current price signals are not conducive to significantly higher wheat prices. We could see a 40 to 50 cent price increase by December 1.

Risk Management Strategies

Friday, July 22, 2016

   About a 30 cents downside price risk exists. Consider putting wheat in the government loan program (MAL), which will provide nine months to take advantage of higher prices. If higher prices do not materialize, the risk is nine months' storage costs. At four cents per month storage cost and a little interest, that is a total of about a 40 cents price risk.

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."