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Market Analysis

Friday, May 20, 2016

   The KC July wheat contract broke the $4.50 price support level. There is now price support at $4.41 and then $4.30 and resistance at $4.62 and $4.80. KC wheat contract prices are technically on a long-run downtrend. Contract price have been in a short-run sideways pattern between $4.40 and $5 since early August 2015. To break the sideways pattern and the long-run downtrend, KC nearby (July) wheat contract price must break the $5 price resistance level.

   During August 2015, the new crop (2016 harvest) basis had a range of a minus 50 cents to a minus 30 cents. The current (May 18) cash basis and harvest forward contract basis has a range of minus 80 cents to a minus 65 cents. This is a 30 to 35 cent decline in the basis. The lower basis may have been the result of higher expected production and test weight concerns.

   Lower prices are the result of projected world wheat production and higher projected ending stocks. The May USDA WASDE report projected 2016/17 wheat marketing year production to be 26.7 billion bushels (bb) compared to 27 bb in 2015/16. The five-year average is 26 bb. World wheat ending stocks are projected to be a record 9.5 bb compared to a 5-year average of 7.6 bb. The world wheat stocks-to-use ratio is projected to be a near record 36.1 percent (29.1 percent avg.).

   For U.S. wheat price to establish an uptrend, world wheat production needs to be less than 26 bb and really needs to be in the 25 bb level. The world wheat stocks-to-use ratio needs to be near 29 percent. Current wheat plantings do not support lower production. It will take unfavorable weather in major wheat producing areas to lower production expectations.

Risk Management Strategies

Friday, May 20, 2016

   If wheat prices break the short-run sideways pattern and the long-run downtrend, it would probably not happen before August 2016. In other words, significant prices are not very likely until August/September and, right now, the odds are not very high for higher prices at all. There is about 50 cents downside price risk. If you can afford the 50 cents, consider selling 25 percent of the wheat across the scales then stagger the remaining 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."