Welch on Wheat: Positive Price Response to Poor Growing Conditions

Image from Oklahoma State University

Market Situation

Crop Progress. Only minor adjustments were made to the U.S. winter wheat crop condition ratings this week. The percent of crop rated very poor increased by 1, the percent rated excellent increased by 1, and the fair category declined by 2. This left the crop condition index score unchanged at 337. The average score for this week of the growing season is 326. The rating of last year’s record setting yield was 362.

The condition index score looks to support USDA’s estimated yield for 2017 of 48.9 bushels per acre, above trendline of 46.8 (which would be indicated by normal index values), and below last year’s 55.3 bushel record. The percent of winter wheat rated very poor and poor in Kansas declined from 26% to 24%; the same categories in South Dakota increased from 38% to 48%.

South Dakota also shows the highest percentages of spring wheat in the very poor and poor categories at 57%, up from 32% last week. The U.S. spring wheat crop index this week is 325, down 23 points from last week and below the average index of 381.

The condition ratings of the Texas wheat crop were unchanged in this week’s report. The index stands at 323 compared to 363 last year and an average score of 290.

Weather. Drought conditions in the winter wheat crop are of most concern in the Dakotas.

The precipitation forecast for the next 5 days shows only light amounts (<1/2 inch) west of the Red River Valley except for the Canadian/North Dakota border. The long-term outlook calls for this region to be one of the wetter than normal parts of the country.

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 0.4° C above normal, with the seasonal high temperature deviation currently forecast for the end of July.

Grain Use. The final export sales numbers on May 31, the end of the marketing year, show all U.S. wheat export sales of 1.043 billion bushels, 101% of the target set by USDA and up from 775 million bushels in 2015/16.

Grain Commentary

The spread between the July and September Kansas City wheat futures contracts at 11:45 am is 17½ cents, up 1½ 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 at 461. I added another 20% to 2017 sales this week at 450. I am ready to price at least an additional 20% at harvest with the option of holding 20% in storage if the market trend is still up.

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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