When Will This Bad Dream End?
Last month's failed attempts at a big corn price move caused by early frost seems like a bad dream. And if September's volatility was a bad dream, wheat's two-year bull/bear market was a nightmare. Wheat has been the prime example of high prices curing high prices. December 2009 soft red winter wheat (see chart below) began its rally near $5 in mid-2007 and reached $11.50 by March 2008 on impossibly tight all-wheat supplies, only to see excess supplies and a weak world economy by 2009.
Prices touched $4.50 in September, a half-dollar under where it all began. Now, with harvest completed and supply known, wheat may be the crop to watch for a clue as to whether this nightmare is over, as fundamentally we may have come full circle. Here is why:
Demand. U.S. domestic use of flour peaked in 2007/08, then dropped in 2008/09 as the recession hit. If Informa Economics is correct (2009/10 column), cheap wheat and an improving world economy may again bring back demand to the pre–bull market beginnings of 2006/07. Better yet, Europe, which reportedly lost 5% of bread demand, may also come back.
Product exports also showed a slowdown but appear to be ready to recover, pending economic recovery and consumers loosening their dining-out purse strings.
Outlook. If history is any precedent, big crops will get bigger and USDA's updates in October through January will show increasing corn yields, especially if a freeze waits until mid- or late October.
Corn met my conservative technical price targets of $3.02 (Summer 2009 column), with $2.74 now possible if Informa's forecast of a 168-bu. national average yield proves true. I'll keep my focus on reducing hedge exposure from $3.02 down to $2.80, letting crop revenue insurance work its magic.
Soybeans have bullish fundamentals in place that may yet make for an interesting fall/winter. In addition, basis is tight, trying to free up supplies for a half-year's worth of exports to be shipped in four months. An inverse market is likely to develop, so I am keeping hedges in the South American harvest time frame (May–July).
Wheat is too cheap to raise, so there likely will be 1 million to 2 million fewer acres of all wheat, which will go to corn/beans in 2010 unless prices improve.
We could see wheat demand improve just when acres fall; feed grains and protein demand might do the same. Breaking the downtrend and a close under $4.40 or over $5 will make me want to own or reown wheat. There was no shortage of $11 wheat; there is (or will be) a shortage of $4 cash wheat, however!
Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact Jerry at firstname.lastname@example.org or (312) 896-2080.
Top Producer, October 2009