As wheat prices remain stagnant at multi-year lows, wheat farmers are tightening their grip on old-crop supplies as they wait out for a return for higher prices.
But analysts aren’t expecting significantly higher prices to return anytime soon with USDA predicting record high world wheat production and ending stocks.
USDA currently projects world wheat production at a record 731.6 million metric tons for 2015-2016, up from 726.5 million metric tons last year. World wheat ending stocks for the current marketing year, meanwhile, are expected to rise to a record 226.56 million metric tons, up from 211.31 million metric tons in 2014-2015.
“Farmers are hesitant to sell into a situation where they’re losing money, and they’re waiting for something better,” says Dan O’Brien, K-State extension agricultural economist. “That’s not a bad financial response necessarily, but the only thing that works against that is cash flow needs. Eventually, if they have to generate cash, you hope that not everyone follows that same strategy and are all forced to sell at once. That’s a common story.”
Farmers, though, still can employ a marketing strategy to spread their price risk, O’Brien says.
By diversifying cash sales of wheat over time, farmers can generate some cash flow while at the same time hedging against the threat of even lower cash prices later. Timing some sales at a later date also leaves open the possibility of capturing potential market rallies in the future.
“I think there would be merit in diversification of your time risk,” O’Brien stresses. “By having a time diversified strategy, which is sell some now, sell some later, at least you’re working your way through this. Sell what you need for cash purposes because people do have cash flow needs, but retain some with the idea that anything could happen down the road.”
Bret Oelke, Marketing Management Coach for Innovus Agra, LLC, in St. Cloud, Minn., recommends using the futures market to capture profit offered in deferred contracts.
September 2016 Kansas City wheat futures, for instance, are priced at $5.42 ¼ per bushel, thereby paying farmers a premium of 47 ½ cents/bu., above the current front month price of $4.94 ¾ per bushel to store wheat. September 2016 Minneapolis wheat futures are priced at 44 ¼ cents higher than the nearby contract. September 2016 Chicago wheat, meanwhile, offers only a 23 ½-cent premium over December 2015 futures.
“Farmers need to take a look at not only what the nearby prices are, but also what further-out prices are,” Oelke points out. “There’s been relatively good market carry in all the wheat contracts, and in some cases, they can pick up 30 to 40 cents or more by hedging out further. They might possibly see some basis improvement as well, depending on where they’re at and what their current basis situation is.”
But if farmers are holding out for the return of a bullish trend in wheat, O’Brien notes that the fundamentals aren’t in their favor. A plentiful supply of wheat in the world and the threat of rising interest rates at the U.S. Federal Reserve are real downside risks farmers must consider.
“The only thing that works against wheat – in the absence of a supply shock somewhere around the world with another exporter or major importer that grows wheat – is this looming issue with the Federal Reserve,” O’Brian says. “They might take action to increase interest rates, which would feed over to the value of the dollar and would hurt us that much more in terms of wheat exports.”