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Market Analysis

Friday, June 26, 2015

   Since mid-January 2015, the KC September wheat contract has traded between $5 and $6. Thursday, June 18, the Sept contract price challenged the $5 support level ($5.08). Friday, June 26, the Sept contract price was as high as $5.72 and closed at $5.69. The KC Sept wheat contract has resistance levels at about $5.60, $5.80 and $6. The USDA releases production and stocks estimates Tuesday, June 30. If the KC Sept wheat contract closes above $5.60 on Tuesday; the next price target is $5.80 and maybe $6. The Sept contract has support at about $5.60, $5.40, and $5.20.

   The 50-cent price increase occurred with little change in world wheat production or stocks expectations. The price rally could be the result of the funds closing short positions (funds may believe that wheat prices are near the bottom or have bottomed out). A price concern is wheat quality. Harvested wheat is mainly in one of two groups: milling quality wheat with acceptable test weight and protein or wheat unacceptable for flour milling. Poor quality wheat will not lower the stocks situation but will lower milling quality wheat stocks. The result would be higher wheat prices for milling wheat (KC wheat contract prices) and relatively high discounts for wheat grade and quality factors (test weight, damage, dockage, foreign material, etc.).

   Terminal elevators have set test weight schedules with discounts starting at about 58 pounds and about 4 cents per half-pound to 55.5, and then 5 cents per pound to 50 pounds (50 pound test weight would be 75-cents discount). Some local elevators have 2 cents per half-pound below 58 and then 3 cents per each half-pound below 55 pounds. Discount schedules may be obtained from local elevators.

   The market has a relatively good idea on the size and the quality of the 2015 U.S. winter wheat crop. In the coming weeks, the market will change its focus on the progress and conditions of the U.S. spring wheat crop and foreign wheat crops. About 80 percent of the world's wheat production is in the Northern Hemisphere. The Northern Hemisphere's harvest is complete in late September. The Southern Hemisphere's wheat harvest is completed in late December or early January.

Risk Management Strategies

Friday, June 26, 2015

   Consider selling a designated portion of wheat on each rally. Have a written marketing plan. Analysis of the last 29 years shows that there is little difference between strategies that include selling all wheat at harvest; selling all wheat in October, November, or December; selling wheat in thirds – June, Sept/Oct, and Nov/Dec; or selling all wheat at harvest and buying KC Dec call option contracts to cover the bushels sold. Strategies that haven't worked well include establishing a storage hedge. This may be the year to sell in one-third lots - June, Sept/Oct, and Nov/Dec.

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."