Record ending stocks weigh on wheat prices

The good news is that the 2009 U.S. winter wheat crop has been planted and that planted acres are expected to be less than last year. The bad news is that 2008-2009 world wheat production is a record 25.1 billion bushels and world wheat ending stocks are projected to increase from 4.4 billion to 5.3 billion bushels - a 12 percent increase in production and a 21 percent increase in stocks.

At this writing, the Kansas City Board of Trade March wheat contract has established a sideways price pattern between about $5.60 and $6.20. March wheat contract prices have traded closer to $5.60 than they have $6.20.

Central Oklahoma and Texas Panhandle cash wheat prices are about 90 cents less than KCBT March wheat contract price. Cash wheat prices are in a sideways pattern between $4.50 and $5.10 per bushel.

At this writing, the KCBT July 2009 wheat contract price is $6.02 and the trading range is between $5.90 and $6.50. Wheat may be forward contracted for 2009 harvest delivery for about $1.10 less than the KCBT July wheat contract price. The harvest forward contract basis range is between a minus 90 cents to a minus $1.50.

This implies that central Oklahoma and Texas Panhandle wheat may be forward contracted for 2009 harvest delivery for about $4.92. This is well below the price needed to cover variable costs, which varies between $5.25 and $6.75. These costs do not include a land charge.

It is difficult to understand how wheat prices could decline from about $8.50 at harvest to the current price of about $4.70 and how the June 2009 wheat price could be $4.90 when it costs significantly more to produce the wheat.

Logic implies that wheat prices must increase — that wheat prices can't be below the variable cost of production. But this logic may be wrong.

In the short run, the market does not care what it cost to produce wheat. All the market cares about is that there is more wheat in storage than is needed. In the long run, the market must offer a price above the variable cost of production or wheat will not be produced.

The biggest marketing mistake that producers make is storing wheat too long. During June 2008, the market signals (projected record world wheat production and higher ending stocks) indicated that the odds were that wheat prices would trend down.

Producers held wheat (I supported the decision) because stocks were tight and if a major country had a crop failure, wheat prices would have increased. In June 2007, world wheat production was expected to be slightly higher than consumption. Stocks were expected to increase and prices were expected to trend sideways to lower. Production was significantly less than expected and prices increased dramatically.

Producers who have wheat in storage must set a date to have the 2008 wheat crop sold. After the date is set, a strategy must be developed to facilitate the timing of the sales.

Relative to 2009 wheat, producers must realize that all costs that have been incurred to plant the wheat should be ignored. From a profit maximizing standpoint, what matters from this point forward is that producers make decisions that will maximize yields relative to weather risks. If prices stay below variable costs of production, maximizing yields will minimize loss.

From a marketing standpoint, there is little reason to price wheat at a loss. This does not mean that prices will not be below $4.90 next June. It simply means that the odds are that during the 2009-2010 wheat marketing year, wheat prices will be above $5.25.

Times have changed. The current world market situation has set the stage for higher profits and for higher losses. For all practical purposes, prices can't be predicted.

Producers need to establish mechanical marketing strategies that do not rely on price outlook. Producers must also allocate additional time to managing finances.

TAGS: Corn
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