About All You Can Say About the Wheat Market – Wow!

“About all you can say about the wheat market is ‘WOW’!” writes Alan May, South Dakota State University Extension economist.  Even though prices were very good one year ago, wheat prices are $1.50 to $2.00 higher than they were in mid-August of 2006, points out May, who writes a wheat market commentary updated every Friday online at http://econ.sdstate.edu/Extension/CMA.htm (click on ‘Wheat Markets’).

Certainly, wheat futures have been influenced to an extent by the corn/soybean price strength, but wheat has had a situation of tight supplies, growing demand and softening production for almost five years in a row, he points out. With current domestic and world supplies of wheat the lowest in decades, the current situation with corn and soybean prices is only adding to what has been a very welcome and very prolonged growth in wheat prices over the last three to four years, he says.

George Flaskerud, NDSU Extension economist, says that wheat prices could peak early this marketing year. Planted acres are likely to increase worldwide in ‘08, and the adverse growing conditions experienced around the world in ‘07 are unlikely to be repeated in ‘08. Flaskerud points out too that Australian wheat production is expected to be up sharply in 2007 and will be available to the world market by December, although their carryover stocks are low. Nevertheless, the pace of exports that is so strong as of August may be front loaded, with the possibility of slowing as world supply and export competition increase later in the marketing year.

On the bullish side, weather problems resulted in hard red winter wheat yields below early expectations, and world wheat production remains below use, including drought in the Ukraine and Russia, resulting in a yield decline for the second year in a row. Canadian wheat planting was down 17%, and hot dry weather has affected yields.  Heavy rains have deteriorated west European crop quantity and quality, and the world stocks/use ratio is projected to be record low.

As well, the wheat market will need to compete for acres in 2008.  However, eports from across the winter wheat area indicate that HRW planted acres may be higher.

Attractive prices would encourage sales off the combine, says Flaskerud, especially if storage for wheat and late-season crops is expected to be tight.

Continue selling on rallies from harvest into October and November, when wheat prices and the local basis historically improves. Use a cash sale or cash forward contract if it reflects a reasonable basis. Otherwise, consider a HTA contract in May ‘08 futures with February/March ‘08 delivery.

Looking toward sales of the ’08 crop, scale up sales this fall along with sales of the ‘07 crop.

Use a combination of crop insurance, contracts and put options, Flaskerud suggests, and limit elevator contracts to CRC/RA-HO guaranteed yield. Consider a cash contract if it reflects a strong basis, he suggests.  Otherwise, evaluate a hedge-to-arrive contract in in May ‘09 futures with Feb/March ‘09 delivery.

Will this price rally continue?  Will it end?
The answer to both questions is ultimately up to you, wrote SDSU Extension economist Alan May in his August 17 wheat market commentary. The real answer lies not in how you respond to these two basic questions, but rather, how you respond to the opportunity at hand and how you plan for making sales in the future, he said.

With this kind of historical price strength, take nothing for granted, May advised. Don’t assume that this market has nowhere to go but higher, and don’t assume that the sky will fall and prices will collapse to the low $3.00 range either. With prices at current levels, it is “gut-check” time if you have wheat in the bin and if you have some ideas for selling 2008 wheat, he said. Price this high is rare and although it is possible we may be in a new price plateau for wheat and other grain commodities, you must decide if you view current price levels as positive and profitable.

You have a wide variety of choices for making wheat sales, May advised. You can store wheat with or without price protection into the future. You may do this to see if basis improves and/or if prices simply continue to move higher. You could store the wheat with a storage hedge and lock in a price for future delivery if you are concerned about price declines in the future. You could sell wheat outright on the cash market and get out of the storage business completely; in other words, take the price offered now and don’t look back.

May said the key to all of these pricing strategies boils down to one word – PROFIT. If today’s cash price for wheat means profit to you, then making sales is the right thing to do. There is nothing wrong with mixing up the sales methods by selling wheat today and holding some back for future sales as long as you have a plan laid out that establishes trigger prices and/or trigger dates that force you to make sales. Profit is the real name of the game, and if these prices mean profit, then the choices should become easier.

U.S. Wheat S/D Presentations Online
Go to www.uswheat.org – under Market Reports, click on ‘Supply and Demand.’ The graphic summaries of USDA’s U.S. and world supply/demand statistics are updated monthly, and available in PDF or Powerpoint.

Tight Stocks, Strong Fall ‘07 Prices Suggest Increased Acres for 2008-09

	2006-07	2007-08	2008-09
Planted Acres	57.3	60.5	61.5
Harvested Acres	46.8	52.1	52.3
Yield/HA	38.7	40.6	42.7
Beginning Stocks	571	455	403
Production	1,812	2,114	2,232
Imports	120	100	100
TOTAL SUPPLY	2,505	2,669	2,735
Domestic Use	1,141	1,191	1,270
Exports	909	1,075	980
TOTAL USE	2,050	2,266	2,250
Ending Stocks	455	403	485
Stocks/Use	22.2%	17.8%	21.6%
U.S. Farm Price	4.26	5.40	4.70

Units: Million acres, bushels per acre, million bushels, s/u in percent, and price in dollars.
Source: USDA 08/07 for 2006-07 and 2007-08, George Flaskerud estimates for 2008-09.

DURUM

Durum wheat production is down in the major durum importing region of north Africa, and combined durum ending stocks in the U.S., Canada, and EU are at a 10-year low, all to the major benefit of durum prices in the Northern Plains. Production in the U.S. is forecast up over 40% from last year, and over 15% in Canada, although hot, dry weather is expected to affect yields somewhat. While durum prices are expected to some harvest pressure, world stocks that remain tight and production problems in major durum importing countries such as Morocco and in the EU will continue to support durum prices.  Even though prices might fall some at harvest, and from levels seen earlier this summer, one can hardly complain about prices in August that were over $7/bu for #1 milling quality – about $2 more than what prices were this spring, and almost double that of a year ago.  Go ahead and sleep well if making off-the-combine sales. Consult with your buyer/local elevator about their thoughts on incremental sales later, and about the possibility of locking in some sales for ’08 new crop.