Friday, June 06, 2008 09:47 AM

Grain Marketing Commentary

Friday, June 6, 2008 

2008 Wheat Marketing Outlook and Strategies

 Wheat Outlook

The May supply and demand report indicated that wheat producers responded to the higher wheat prices.   World wheat production is expected to be up 50 million metric tons (mmt) for 2008-09 to 656 mmt, a record and total domestic use at a record of 642 mmt.  World ending stocks are projected to increase from 110 mmt to 124 mmt. This is the same level as 2006-07.   Worldwide, we have a record crop, record use, and ending stocks at near record lows.  It is shaping up for another very volatile price year for wheat. 

The United States winter wheat crop is projected to increase from last year’s 1.52 billion bushels to 1.78 billion bushels.  Ending stocks of all US wheat in 2008-09 is projected to be up from 239 to 483 million bushels.  While ending stocks are up significantly, it is still tight based on historical levels.   

The United States wheat production represents only 10% or less of total world wheat production.  The United States makes a major impact in the export market, where we represent 25 – 30% of total world exports.  One of our competitors in the export market is Australia.  Their normal production is 22 – 25 mmt and exports 15 mmt.  The past two years they have experienced drought, which cut their production and exports by one-half.  This year they are experiencing better weather and expect a rebound in production and exports.  With the bigger crop in Australia and expected production increases in Russia and the FSU-12, wheat prices may not go back to $13, but swings in price of $2 - $3 can still be expected.  

Technical Analysis

The 20-day moving average which provided price support on the rally into mid-March has become resistance on this price decline.  Presently, prices in the July, December, and March futures contracts are trying to trade above the 20-day moving average.  Two consecutive closes above the 20-day moving average would be a signal of a possible short term bottom.    

If the market does rally, there are no major resistance levels until $9.50 to $10.00 based on the December futures contract.  Price support levels are at $7.00, $6.00 and $5.00 based on the December futures contract.  At this time with harvest upon us, I think we are at best in a sideways trading range between $7.75 and $8.75 based on December futures. 

Marketing Strategies 

In the table below are the returns to three post harvest marketing strategies for wheat.   In each strategy, the returns are based on a June 15 cash wheat price, 8 percent interest, and on-farm storage cost of 1 cent per month.  The returns are what you have remaining to pay for extra handling costs, insecticides, labor, management, and fixed costs.   In each strategy, a December 1 ending time period was used because of its consistent returns.  However, maximum returns can vary from October 1 to February 1.  

Strategy 1 is a storage hedge to capture the basis improvement.  It requires the wheat to be farm stored until December 1, and a short March futures position to be established.  On December 1, the wheat is sold for cash and the March futures contracts are bought back which results in capturing the basis improvement. This strategy has returned the most consistent returns over time.  It has resulted in a positive return 12 out of the past 13 years.  Due to our wide cash basis again this year, this strategy has the potential to return over  $2.00 per bushel.    

This strategy can also be used, if you have a July Futures Only or Hedge-to-Arrive contract with your elevator.  You may want to check to see if they will allow you to roll your July futures contract to March.     

In strategy 2, the wheat is farm stored from harvest until December 1 un-priced to capture both the improvement in basis and futures.  This strategy has resulted in huge returns the past two years.  In previous years the returns were more variable from year to year.   

In strategy 3, the wheat is sold at harvest and a long March futures position is held until December 1.  This strategy simply tries to capture the improvement in the futures price from June 15 to December 1.  While the returns have been positive the past 2 years, the previous years have been mixed.      

The returns for the individual years for each strategy can be found at the following web site. http://extension.missouri.edu/seregion/Marketing_Strategies.htm

Strategies for Wheat futures rolled from 2007

If you have July 2008 futures contracts that were rolled from 2007, what are some of the strategies that you may want to consider? 

 Three strategies:
 1. Sell at harvest
 2. Roll the futures contract to March, and set the basis immediately for December 1
 3. Roll the futures contract to March, but leave the basis open until December 1 

Assumptions: On-farm storage available; basis not set at harvest, interest rate 8% (2 cents/ month), On-farm storage cost 1 cent/month; $5.00 July futures contract rolled over from 2007; the spread between the July 2008 futures and March 2009 futures 60 cents (July ’08 $7.85 and March ’09 $8.45), harvest basis of $2.40 under the July 2008 or $3.00 under the March 2009, and December 1 basis $1.80 under the March 2009.

1. Sell at Harvest – Result is a Cash Price $2.60.

$5.00 July futures contract rolled over from 2007 minus $2.40 harvest basis

2. Roll the futures contract to March, and set the basis immediately for December 1. -  Result is a Cash price $3.64

$5.00 July Futures plus 60 cent gain in the futures spread minus $1.80 basis for December 1 minus 16 cents storage and interest costs. 

3. Roll the futures contract to March, but leave the basis open until December 1

Basis on December 1 is $2.00 under the March – Result is a Cash price $3.44

$5.00 July Futures plus 60 cent spread gain minus $1.80 basis minus 16 cents storage   

Basis on December 1 is $1.50 under the March – Result is a Cash Price $3.94

$5.00 July Futures plus 60 cent spread gain minus $1.50 basis minus 16 cents storage

Basis on December 1 is $1.00 under the March – Result is a Cash Price $4.44

$5.00 July Futures plus 60 cent spread gain minus $2.00 basis minus 16 cents storage

David Reinbott, reinbottd@missouri.edu Farm Management Specialist Last modified: June 06, 2008