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Market Analysis

Thursday, October 25, 2018

   The market took out the $5 KC December wheat contract support price and then broke the $4.93 low set in early July. The next KC December contract target price may be $4.78 which is the contract low set in mid-December 2107. The only good news is that the basis has held. If the basis goes south, not telling how low cash wheat prices will go. In mid-December 2017, cash wheat prices were in the $3.30 range. The KC Dec prices was $4.78 and the basis a minus $1.48. The current basis is a minus 10 cents.

   The leading reason that KC wheat prices are relatively low is relatively low export demand. The USDA projects 2018/19 wheat marketing year U.S. hard red winter wheat exports to be 10 percent less than 2017/18 wheat marketing year exports. As of October 18, total wheat marketing year export sales were 36 percent less than at the same time last year.

   Factors resulting in lower exports may be the relatively high value of the U.S. dollar compared to other major currencies. The dollar index has increased about three percent to 96.3. This is equivalent to adding 20 cents to export prices.

   A third reason for lack of export demand may be Russian wheat production, supply and exports. Russia is projected to export 1.286 billion bushels. During the August/September time period, Russia exported about 168 million bushels per month. At this rate, Russia's 1.286 billion bushel exports will be completed by late February. Maybe by then, U.S. wheat exports and prices will increase.

Risk Management Strategies

Thursday, October 25, 2018

   Setting a date to have all wheat sold and then selling it in lots (3 or 4 equal lots) between now and the final date is often a sound plan. This takes all the emotion out of the situation and produces an average price. Another strategy is to establish price targets and kill dates. For example, the rule may be, "sell 5,000 bushels if the cash price reaches $5, or November 20." If the price reaches $5 before Nov 20, 5,000 bushels will be sold. If the price doesn't reach $5 by Nov 20, 5,000 bushels will be sold on Nov 20. Upon the sale of the 5,000 bushels, another target price and kill date is set for a set number of bushels.

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."