Welch on Wheat: U.S. Stocks Raised 10Mln Bushels

Market Situation

WASDE. No major changes reported in the U.S. or world supply and demand balance sheets in today’s World Agricultural Supply and Demand Estimates. U.S. wheat supplies were up 10 million bushels on small increases in carry in stocks, production, and imports. With no changes in the use categories, ending stocks were up 10 million bushels as well. The season average farm price estimate went up 5 cents to $4.30 per bushel setting the projected PLC wheat payment at $1.20 per bushel.

World wheat supplies were higher this month compared to the May estimates on relatively small increases in beginning stocks and production. With use little changed, this added to ending stocks, raising the days of use on hand estimate to a 130 day supply, the highest since 1999.

Crop Progress. The U.S. winter wheat crop condition score fell 3 points this week to 337, down from 363 last year but still above the average of 326. Notable declines in condition this week were the very poor and poor wheat in Kansas increasing from 25% last week to 26% and the same categories in South Dakota increasing from 20% to 38%.

South Dakota also shows the highest percentages of spring wheat in the very poor and poor categories at 32%, up from 26% last week. The U.S. spring wheat crop index this week is 348, down from 364 last week and below the average index of 383.

The Texas wheat crop rated higher this week with a 5% increase in the good category and declines in poor and fair. The Texas index is 323, up 7 points for the week and above the average index for this late in the year of 290.

Weather. A comparison of drought monitor maps over the last month shows the increasingly dry conditions in the Northern High Plains. North Dakota this week shows to be 100% in some degree of drought intensity and South Dakota is 79%.

Significant precipitation is in the forecast for Montana and North Dakota over the next 5 days while rainfall is expected to be light for most of South Dakota.
Temperatures are forecast to be in the upper 90s across much of South Dakota today and move into Nebraska and Iowa this weekend. Heat Index values in the upper 90s to low 100s extend into early next week.

The Oceanic Nino Index from the Climate Prediction Center is forecast to continue in mostly neutral territory this summer into early fall. The temperature reading this week was 0.6° C above normal, in El Nino territory, with the seasonal high temperature deviation currently forecast for the end of July.

Commitment of Traders. The Commitment of Traders Report released today shows money managers still net short corn, soybeans, and soft winter wheat, but less so in the case of corn and wheat. Long contracts held in corn increased 32,187 while short contracts held decreased 38,849 for an increase in net longs of 71,036.

Kansas City wheat positioning was slightly more bearish. Not tracked here every week is spring wheat on the Minneapolis exchange where managed money traders are bullish 9,159 long contracts compared to 5 shorts.

The spread between the July and September Kansas City wheat futures contracts today is about 18 cents, up 2 cents from the first of April. This amount is above full carry for that 60 day period (2 months x 6 cents per bushel/month = 12 cents). Any percentage of carry above 67% is generally considered a bearish commercial market indicator.

Marketing Strategies

2017 Wheat Marketing Plan. With a lower acreage base for wheat, we are seeing a positive price response with less than favorable growing conditions even with adequate carryover crop supplies.

I priced the first 20% of the 2017 wheat crop at 480 on the best prices we had seen since last summer. The weather rally in early May provided an opportunity to add to pre-harvest sales. I am ready to price additional wheat prior to harvest then wrap up sales for the year around harvest.

Depending on the quality of the crop and the cost and availability of storage, there may be an opportunity to capture the carry in the market and a better basis on this year’s wheat crop. This can be accomplished by contracting to deliver grain later in the fall.

If I am still concerned about missing out on the possibility of higher prices later in the year, I can combine contracting with the purchase of call options. If this seems too expensive, consider buying calls and selling calls. This limits the upside potential but lowers the cost of the trade significantly. For more on these types of marketing strategies, see “The Minimum Price Contract” and “Using a Bull Call Spread” as part of our Risk Management Curriculum Guide.

Upcoming Reports/Events.
June 23 – Cattle on Feed
June 29 – Hogs and Pigs
June 30 – Acreage; Grain Stocks
July 1 – Registration opens for Master Marketer, brochure available here. Registration opens for TEPAP, brochure available here.

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