Market Signals to Sell Just Harvested Wheat Now- Kim Anderson Offers His ExplanationFri, 27 Jun 2014 05:53:49 CDT
According to OSU Grain Marketing Economist Dr. Kim Anderson, the current market seems to be telling wheat producers to sell their physical wheat and consider buying an option to participate in a rally that might be ahead. The following market analyst was written by Dr. Anderson and is being released on his website on this Friday morning, June 27, 2014:
"During the last 8 trading days, the KC September wheat contract price has traded in a 40 cent range ($7.41 to $7.01). Within this range, the high Sept contract close was $7.27 and the lowest close was $7.04 for a 23 cent range for the closes. The KC Sept wheat contract price is in a sideways pattern between about $7.41 and $7. Closes above $7.41 would indicate a price target of $7.86 with weak resistance at about $7.62. The $7.41 price range has relatively strong resistance.
"At this writing, the KC July wheat contract is trading near the same price as the KC Dec wheat contract. The Dec contract price is 4 cents higher than the Sept contract price. The market is not willing to pay for storage and interest. This is a signal to sell what now. With a zero basis spread between July and Dec, selling wheat and buying "near-the-money" Dec Call options should be considered as compared to storing wheat for Oct/Nov sales. With the Dec contract price near $7.20, a $7.20 call is about 40 cents. The Dec call option expires on Nov 21, 2014. Storaging wheat until mid-November would cost about 20 cents. Saving 20 cents by selling wheat now and applying the savings to the cost of a $7.20 Dec call would lower the cal cost to about 20 cents per bushel or $1,000 for each 5,000 bushel contract.
"With higher than expected foreign wheat production and good 2015 wheat crop planting conditions, 2014/15 marketing year prices could easily decline below $6. With lower than expected foreign wheat production (especially Argentina and Australia) and relatively poor planting conditions, wheat prices could reach $8. Producers can bet on higher prices and limit losses to about 25 cents by buying KC Dec wheat calls. With Dec calls, the bet ends on Nov 21, 2014. For another 10 cents (about 35 cents), the bet can be extended until Feb 20, 2015.
"With relatively tight hard red winter wheat stocks and relatively large foreign wheat stocks, the market must figure out how to ration HRW wheat. Average HRW wheat domestic use is about 440 million bushels (mb) (I did not count the 642 mb domestic use in 2012/13). The USDA projects the total 2014/15 HRW wheat supply to be 920 million bushels (720 mb production plus 200 mb beginning stocks). If 440 mb is used domestically, 480 mb remains for export and ending stocks. The 10-year average HRW exports is 436 mb and the 5-year average is 442 mb. Either domestic use, export use or both must be below average or HRW wheat must be imported. With HRW wheat ending stocks at 200 million bushels, 2013/14 Oklahoma HRW wheat prices averaged about $6.95 and the price range was between about $5.90 and $8.10.
"The market is signaling that wheat should be sold now. The current cash price is near $6.90. A "near-the-money" KC Dec call option may be purchased for about 40 cents (20 cents after saving 20 cents storage) and a KC March "near-the-money" call may be purchased for about 50 cents (30 cent after storage savings). Producers who want to minimize risk while staying in the market should consider selling wheat a buying Dec and/or March call options."
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