The wheat market: so many questions, so few answers. Why are futures prices at record levels, and your local cash prices are one-third less? How can a wheat producer take advantage of the current prices? What are the implications of high wheat prices on the corn and bean markets? Let’s sit down with several Extension Marketing Specialists and get a good picture of where we have been, where we are going, and what to do about it.

Futures prices are well above $8 per bushel. Cash prices are in the $6 range for old wheat. And new wheat prices are at $5. That is a speculative market that reflects short supplies and high demand, with the expectation of bigger supplies next spring, but still strong demand. So how did we get here? At Kansas State University, Mike Woolverton says there are numerous reasons for the current tight wheat market, “Major Northern Hemisphere wheat producing and exporting countries harvested smaller than expected crops this summer. Freeze damage in the United States and heavy rain at harvest in the U.S. and Western Europe reduced the output and quality of wheat. Canada’s crop was hurt by dry weather as was wheat in Eastern Europe, the Former Soviet Union, and China. Global wheat stocks were at a 30-year low when market news services reported that continued drought in Australia and dryness in Argentina during the wheat reproductive period in those countries is putting the Southern Hemisphere harvest in doubt. If it doesn’t rain in Australia or Argentina within the next week or so, replenishment of global wheat stocks will have to wait until next June and July.”

Those factors have keep a fire under the wheat market, but at South Dakota State University, Allan May fears the fire will die out at some point, “Whenever a market runs this hard and this fast, the concern is that what the market gives…the market can take away. The one real support under this market however, is the very real concern over very tight domestic and world wheat supplies. With wheat supplies at the lowest levels in thirty years, and with demand for U.S. wheat very strong, this recent rally may have more “legs” under it than the type of rally that is supported by a short term weather concern or short term bullish demand.”

Whether the market keeps blazing or not, there is currently profit in it for the wheat producer, and recent sales have certainly been at profitable levels. May says the marketing opportunities have been quite good, “. Even though basis is much wider than we would like, don’t look the cash price “gift horse” in the mouth either. I have been saying for months that as prices have moved higher one should honestly consider making some sales with prices at these levels. If you made wheat sales last week, last month, or several months ago when we all thought that we were looking at some very good wheat prices, don’t kick yourself too hard over those sales now that wheat prices are much higher. While it may be easy to second-guess those sales, think about the word “profit” and if you made a profit on those sales, that is a very good thing.”

But if the market has “legs,” could it remain for quite a while longer? If you ask that question of Kansas State’s Mike Woolverton he will tell you there is danger in waiting too long to take advantage of high prices, The real danger is that this panic will cause the wheat market to collapse on itself. The lifecycle of a panic is this: Price starts to increase as market participants, including speculators, come to the realization that there is a shortage of a commodity. Buyers of the physical commodity start to buy ahead to cover needs, afraid that the commodity will not be available in the future or price will go up to a prohibitively high level. As price reaches a ridiculously high level, commodity users slow purchases as their operating margins shrink to zero, producers announce large production increases, and speculators offset positions to harvest profits or even reverse positions to take advantage of the anticipated downside price slide. As the panic peaks and price starts to fall dramatically, everyone rushes to the exit at once. Speculators try to limit losses, some owners of the physical commodity attempt to sell in the cash market to capture inventory price gains, but most buyers of the physical commodity sit on the sidelines, waiting for price to bottom out. Price run ups can take a long time, but the drop can occur very quickly.” He says the futures market is estimating new crop prices at $1.60 lower than they are now and $2 less for the 2009 crop.

If you are out of old wheat, but plan to produce a 2008 crop, Melvin Brees at the University of Missouri suggests the options market may be the best bet to achieve profitability, “These July 2008 futures prices are also offering the opportunity to use a put option to set a futures price floor near $5.00. Thursday, August 16, 2007, CBOT closing price was $5.75 ½ for the July 2008 wheat contract. A $5.70 strike price July put option with a premium (cost) of $0.52 protects a net futures price of more than $5.15. That’s the $5.70 strike price minus $0.52 premium, minus brokers’ fees. A $5.30 July premium of just over $0.30 protects a net futures price near $5.00.”

With all of the excitement about wheat, what are the implications for the corn and bean markets, since all three commodities are fighting for acreage? At the University of Illinois, Darrel Good says if 2008 corn consumption increases to 13 billion bushels, then acreage will have to remain high. And he says if soybean stocks decline as expected, with a corresponding increase in consumption, there will have to be significant soybean acreage next year also. He says additional crop acres will have to come from somewhere, “If U.S. winter wheat seedings are increased significantly, if more U.S. soybean acreage is needed in 2008, and if U.S. corn acreage needs to remain at the 2007 level, corn and soybean prices will continue to be well supported. Prices of those two crops will have to be in the right relationship at the right time to direct plantings and perhaps high enough to divert acreage from other crops. In 2007, acreage of cotton and spring wheat (excluding durum) declined by nearly six million acres. In addition, acreage of all crops (including harvested acreage of hay) increased by 3.7 million acres. Can those types of adjustments continue in 2008?”

Summary:
With the corn, bean and wheat markets where they are, it is a great time to control farmland. High wheat prices from short global crops have created strong futures prices, and despite the wide basis, cash prices are at profitable levels. Outlook specialists advise producers to take advantage of both old crop and new crop prices if possible, because next spring will bring the opportunity to fill up the global reserves and weaken prices. However, wheat will continue to compete with corn and beans for some acreage, and wheat may have to defend itself if corn and bean prices rise any further.