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Market Analysis

Friday, August 11, 2017

   The August WASDE (World Agricultural Supply and Demand Estimates) report contained alarming projections. 2017/18 marketing-year world wheat ending stocks were increased to a record 9.6 billion bushels (bb) compared to last year's record of 9.2 bb. Foreign wheat production was projected to be a record 25.6 bb compared to last year's record 25.4 bb. US wheat production was projected to be 1.739 billion bushels compared to last year's 2.310 bb.

   Russian wheat production was projected to be 2.847 bb compared to last year's 2.650 bb and a five-year average of 2.326 bb. Ukraine's wheat production was projected to be 974 million bushels (mb) compared to a five-year average of 858 mb. Kazakhstan's production was projected to be 514 mb compared to a five-year average of 482 mb. Projected production for these three hard wheat producing countries was increased 322 million bushels. This increase was the major cause of the increase in world wheat ending stocks and for the recent decline in wheat prices.

   If the August WASDE production and ending stocks estimates come to fruition, $5 wheat prices during the 2018 harvest may be a pipe dream. For $5 wheat, projected world wheat ending stocks need to be in the 9.0 bb range. Significantly lower wheat stocks aren't very likely until the 2018/19 marketing year.

   The KC December wheat price chart indicates that there is about 35 cents price risk in the market and about 60 cents upside potential. Unless Argentina's or Australia's wheat production is significantly higher than expected, wheat price should be near the bottom.

Risk Management Strategies

Friday, August 11, 2017

   If you're using the 1/3, 1/3, 1/3 strategy, stay with it. Otherwise, consider establishing a mechanical marketing strategy. Set price (target) levels with assigned bushel amounts plus a kill date for each price level to occur. If the target price occurs, sell the specified amount of wheat. If the kill date arrives before the target price, sell the specified amount of wheat.

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."