TThe May WASDE report was bullish, bearish, and/or neutral whichever way you want to look at it. The report set benchmarks for U.S. wheat relatively high and for foreign wheat production relatively low. The odds are that Oklahoma's wheat price may decline into July or August and then increase into the December time period. Given production uncertainty, I feel like a blind person searching for a room in a strange building. Even if I think that I know something about wheat, the corn situation (tight old crop and abundant new crop) causes me to modify my thinking.
USDA's Oklahoma wheat production (154.8 million bushels (mb)) estimate was about 10 million bushels lower than expected. United States' wheat production (2.245 billion bushels (bb)) was higher than expected (2.196 bb) and world wheat production at 24.9 million bushels was about as expected. Foreign wheat production (22.65 bb) is projected to be 870 mb less than last year. Lower production is projected in Ukraine, Eastern and Western Europe, and Australia and Argentina (a long time away). Record production is projected in India (harvest is nearly complete) and China.
With relatively large projected 2012/13 marketing year wheat exports, U.S. wheat ending stocks (735 mb) are projected to be less than 2011/12 ending stocks (768 mb). World 2012/13 wheat ending stocks are projected to be 6.9 bb compared to 7.2 bb for 2011/12. The world's ending stocks-to-use ratio, a stronger indicator of supply versus demand, is projected to be 27.4 percent which is near the five-year average of 27.1 percent. The U.S. 2012/13 wheat stocks-to-use ratio is projected to be 30.7 percent compared to a five-year average of 32.2 percent.
This week, I traveled southwestern Oklahoma and I do not think that as much wheat will be harvested as projected. First, a significant amount of wheat is being baled. Second, white (empty) heads are appearing. I'm talking big, beautiful heads with nothing in them (note that I am an Ivory Tower Economist, not an Agronomist). The Oklahoma wheat price is near the projected price of $5.75. The KCBT July wheat price is near $6.10. The next KCBT price support is about $5.76. This implies that Oklahoma cash wheat prices could decline to about $5.40 within the next few weeks. If the U.S. winter wheat crop and the corn crop are as large as expected, Oklahoma wheat prices could decline to $5.10. A key indicator is if the KCBT July contract price breaks the $5.76 support.
I am predicting $5.40 for late May/early June delivered wheat in central Oklahoma. Given the price uncertainty, if you are worried about lower prices, consider contracting or selling 15 to 20 percent of your expected production. If you are not worried about lower prices, consider selling one-third of the wheat at harvest delivery, one-third in late-September/early-October and the final one-third in the November/December time period.
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."
