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Market Analysis

Tuesday, January 10, 2017

   Why have wheat prices increased 61 cents ($2.77 To $3.38) since mid-November? Note that of the 61 cents, 18 cents was an increase in the KC March futures contract price and 43 cents has been due to the basis. This implies a local demand driven price increase rather than a global price increase. One reason is that the market needs 2016 wheat that was placed under the loan to enter the market rather than being forfeited to CCC.

   Another reason may be that elevators need the wheat to meet export demand. HRW wheat export sales as of Dec 30 were 88 percent higher than the same time period last year and outstanding shipments are 57 percent higher than last year. The market must buy 2016 wheat to meet export demand.

   The current Oklahoma local elevator basis is mostly between minus 90 cents to a minus $1.10 (KC March). The harvest basis bid is mostly between minus 90 cents and a minus $1.00 (KC July). With good test weight and protein, I expect the harvest basis to be in the minus 60 to minus 70 cent range.

   The KC March wheat contract price has resistance at $4.40 and strong resistance at $4.45. There is support at $4.20 and $4. Export demand, weather conditions and planted acres will be the major forces impacting KC futures contract prices. Closes above $4.45 will indicate a KC March price target of $4.60. Closes below $4.20 would imply a target of $4. I expect the basis to continue to improve.

Risk Management Strategies

Tuesday, January 10, 2017

   Wheat prices are getting in the range to keep loan wheat in the market. Now is probably the time to start selling some wheat. For new crop wheat: with break-even prices in the $4.50 range, now is probably not a good time to forward contract, especially with a minus $1 basis. At harvest, new crop wheat may be eligible for the $3.15 loan. The new crop forward contract price is around $3.60.

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."