Wheat farmers will be well advised to take some actions to reduce marketing risk for the 2010/2011 crop.
A lot can happen to move prices up or down, says Texas AgriLife Extension grain marketing specialist Mark Welch.
“Look to do some price risk management and at least lock in a floor,” Welch said at the Big Country Wheat Conference recently in Abilene. “We could see some good market opportunities.”
Welch said early August price improvements came too late for many producers who sold wheat right out of the field and he also expressed concern over a sharp drop in basis, from as much as 55 cents a bushel advantage to well below $1 negative basis.
He said adequate supply, increased competition (especially from former Soviet Union countries), the economy, and the possibility of changing weather patterns all may affect the wheat market.
“The economy is a big factor but we are making progress,” he said. “Some issues remain unresolved, such as housing and employment. Jobs in the private sector will be a key. But we have gone from a situation of absolute fear to one of cautious optimism. And we have a great degree of caution.”
He said improvement in the overall economic health will be a plus for commodities.
The wheat supply, Welch said, is adequate. “Planted acres for the 2010/2011 crop is still a big question.” He said wheat looks more favorable with Kansas City prices at $7 than when they were at $5.
Weather across the High Plains next winter also will play a role in wheat markets. The El Nino effect that has influenced weather patterns recently is transitioning, sooner than expected, to La Nina. That typically results in dryer winter months in the High Plains.
Competition from other wheat producing countries also affects U.S. markets, Welch said. Fires and drought over a large part of Russia’s wheat production area will influence price movements. He says that drought could move into North America and affect crop production.
Also, 12 countries from the Former Soviet Union have emerged as key players in the international wheat market. Those 12 countries have supplanted the United States as the number one wheat exporter, accounting for some 28 percent of the export market. U.S. market share has dropped from 29 percent to 18 percent.
Europe has also taken some of the U.S. export market but with economic downturns in Europe, U.S. wheat could regain some advantage.
Welch said demand for wheat also will increase with population growth.
“But we’ve had high wheat carryover stocks since the late 1980s.”
He said the export market dried up this year just as the U.S. crop was coming in. USDA projected wheat exports at 885 million bushels, but some contracts were cancelled and that figure could be hard to realize.
Export losses also contributed to the fall in basis as elevators filled their bins and had no place to move the new crop.
Welch said export opportunities look better for the 2010/2011 crop. “Projections estimate a 1 billion bushel export market, up from that 885 million bushel mark. By the first week in August we had already exported 300 million bushels of wheat,” he said. “It took 12 weeks to hit that mark last year.”
He said the U.S. reputation for providing high quality wheat and as a reliable supplier will help with market share. Even though those 12 former Soviet Union countries now rank as number one in wheat export, reliability may be a factor.
In the last 50 years, Welch said, the United States has dropped below a plus or minus 10 percent of usual production trend only four times. Those 12 Former Soviet Union countries have dropped beneath that line 25 percent of the time.
“So the world is relying on an area with production variability for a large share of its wheat,” he said.
He said current price increases seem to mirror similar increases in 2007. “But the stock situation is different in most areas. The United States had tight ending stocks in 2007. We don’t have that same stock shortage today.”
He said in 2007 stocks were adequate for 67 days. Today stocks are adequate for 106 days. The 20-year average is 108 days.
“Our stocks are adequate,” Welch said. “We are not running out of wheat.”
All the uncertainties in the international wheat markets make it important for farmers to look at a number of price risk management opportunities, Welch said. He suggested farmers check with elevator operators, marketing consultants and Extension specialists to develop a marketing plan for the 2010/2011 wheat crop.