The KCBT July wheat contract is staying above the $5 support by the "skin of its teeth." If July contract prices break the support, there is expected to be at least a 20-cent decline and possible a 40-cent decline. The saving grace may be that the funds are reported to have record short positions in the grains and there may not be enough sellers to drive the price 40 cents down. Also to take a profit, the funds have to buy contracts to offset the shorts. This may provide some price support.
The NASS/USDA crop conditions reports indicates that the winter wheat crop improved. Both Kansas and Oklahoma's crops improved 3 percent – Kansas 63 and Oklahoma 68 good to excellent. Texas' wheat crop improved 10 percent with 55 percent now classified good to excellent. The rain and snow forecast over the weekend should only help the crops.
The wheat market is sending a signal to producers that it prefers to buy wheat later rather than earlier. The spread between the KCBT May and July wheat contracts is about 13 cents. The spread between the July and December contracts is 29 cents. It costs commercial elevators about 4 cents per bushel per month to own wheat and it costs producers 5 to 6 cents. For producers, this includes 4 cents per bushel per month to store wheat in commercial storage and 1 to 2 cents per month interest. Commercial elevator costs are about 2 cents storage and 2 to 3 cents interest.
The cost for producers to own wheat between now and June is 12.5 to 15 cents. The market is offering 13 cents with a storage hedge. The cost for producers to store wheat from mid-June to mid-November is 25 to 30 cents. The market is offering 29 cents with a storage hedge. Costs are slightly less for the commercials and potential profit is a little higher. Additionally, with the relatively low basis that is being offered now, the potential for higher gains are there from basis improvement.
If you're going to sell wheat out of storage, consider selling it in equal increments over the next four weeks. As for pricing 2010 harvested wheat, consider waiting until harvest or later. If 2010 wheat yields are above average, consider selling one-fourth to one-third of the wheat at harvest and the remainder in late fall and early winter. If 2010 wheat yields are below average, consider selling half to two-thirds at harvest and the remainder in late fall.
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."
