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Market Analysis

Friday, June 17, 2016

   On June 8, the KC July wheat contract price peaked at $4.95 and closed at $4.93. On June 16, the July contract price bottomed at $4.50 and closed at $4.51. It appears that $4.50 may be the new KC July support price level and $5 the resistance price level. ($5.11 and $4.68 for the Sept contract price). KC July wheat contract prices are expected to continue the sideways pattern between $4.40 and $5.20.

   Higher wheat production in Kansas and Oklahoma has resulted in storage problems and has placed pressure on the basis. During the last week, Oklahoma local elevator basis has declined 5 to 15 cents, depending on location. Reports indicate that some elevators are piling wheat on the ground. Lack of storage may result in even lower basis and possibly lower futures contract prices.

   The June WASDE showed a 79 million bushel (mb) increase in U.S. wheat production and a 141 mb increase in world production. Of the world's 141 mb bushel increase, 75 mb were U.S. hard red winter wheat. (USDA's HRW wheat production estimate may be too low.) The other 76 mb were from increased production in the EU and Russia. The fact remains that world wheat production is projected to be 26.85 bb (26.98 bb record) and consumption is projected to be 26.31 bb. World wheat ending stocks are projected to be increase to 9.47 bb compared to 8.93 for 2015/16 and a 5-year average of 7.55 bb.

   There are reports of too much rain on the Russian and EU wheat crops which may lower the quality of some wheat. The same wet weather resulted in increased yields that may offset some of the losses. The fact is that expectations are for more wheat to be produced during the 2016/17 marketing than are used.

Risk Management Strategies

Friday, June 17, 2016

   Significant price increases are not very likely until the August/September time period, and right now the odds are not very high for higher prices in the near future.. There is about 40 cents downside price risk. If you can afford the 40 cents, consider selling 20 percent of the wheat on small price rallies. Then stagger the remaining 80 percent over the September through December (February, if taxes are not a problem) time period.

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."