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Market Analysis

Friday, August 26, 2016

   Just when it appears that there is a sliver of hope for higher prices, the market takes it away. Both the KC September and December wheat contracts closed below the support prices ($4 for Sept and $4.30 for Dec. KC wheat contact prices had been on a sideways pattern since early July. Today's closes are a signal that the long-run down trend that started in December 2012 is not finished.

   The driving force behind lower prices may be higher than expected Canadian spring wheat production estimates, record Russian wheat production, relatively high Ukrainian production, the announcement that Russia my temporarily remove export taxes and that Australia is building additional grain storage to handle the projected near record 2016 wheat crop. A potential record U.S. corn and below average U.S. hard red winter wheat protein may also be weighing on prices.

   A project that samples and tests U.S. hard red winter wheat at harvest indicates that the average protein for the 2016 crop may be 11.2 percent. The report also indicates that the protein is a good milling quality (low but good). There is often a negative relationship between yields and protein. Given relatively high yields around the world, relatively low protein may be the norm. Relatively low hard red winter wheat protein levels may be why there is a 72 cent spread between hard red spring (12.5 plus protein) and hard red winter wheat prices. The KC HRW wheat market has 11.2 percent protein at a 16 to 26 cent premium and 12 percent protein wheat at a 47 to 57 cent premium.

   As of September 1, the world has normally harvested 80 percent of the annual harvest. The marketing year price trend is normally set in late August and early September. The current trend is down.

Risk Management Strategies

Friday, August 26, 2016

   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."