Many wheat market analysts did not expect Texas/Oklahoma wheat prices to be in the $6.25 to $6.65 range (higher than expected). The basis was not expected to be in the -$0.90 to -$1.65 range (lower than expected). Nor did many market analysts expect the current KCBT December wheat contract price to be $7.60 and to have been as high as $8.47.
Now that prices are relatively high, the only way to take advantage of the higher than expected prices is to sell your wheat! Note what the funds are doing.
Index Funds can only own net long (bought) futures contract positions. Between June and mid-September, Index Fund contract ownership went from about 180,000 wheat contracts (long), to about 200,000 wheat contracts. Index Funds now own about 170,000 wheat contracts. The net positions changed by about a minus 10,000 contracts. Currently, Index Funds own wheat contracts that total about 850 million bushels.
Managed Funds may hold net short (sold) or net long (bought) contract postions. In June, the Managed Funds’ wheat futures contract positions were about 50,000 contracts short (250 million bushels sold). In mid-September, the Managed Funds futures contract positions totaled about 50,000 long (250,000 million bushels bought). This was a change of 500,000 bushels long.
Past observations indicate that when funds buy contracts, prices tend to increase. However, funds tend to start selling contacts (taking profit) before prices peak. It appears that the funds may be selling off their long positions. This does not mean that wheat prices have peaked. It just indicates that the funds are taking profit while it is available.
Lessons for producers are that “when you own something, you have to sell it to make a profit” and “it is often good management to stagger sells over time.
Most analysts agree that above-average world and excess U.S. wheat supplies exist. An underlying concern is about the supply of good quality milling wheat.
Corn yields and production are unknown. Some analysts’ project corn yields to average above 160 bushels per acre, and other analysts predict that yields will average 155 bushels per acre. Where yields finally end up will make the difference between 2010-2011 corn marketing year corn ending stocks being 700 million bushels or 1.2 billion bushels.
Corn average yields of 155 bushels per acre could result in Chicago Board of Trade (CBT) corn contract prices being between $4.75. Yield averaging over 160 could result in $7 corn.
Corn prices may support wheat prices. During June 2010, 2010-2011 marketing year corn ending stocks were projected to be 1.6 billion bushels and CBT corn futures contract prices were between $3.35 and $4.
During June 2010, KCBT wheat contract prices were between $4.60 and $5.10. Wheat priced on the cash market for livestock feed was at about 90 percent the price of corn. Corn prices will probably create a price floor for wheat.
The market is still watching the wheat stocks situation in Russia and wheat production in Canada, Argentina, and Australia. Planting conditions for the 2011-2012 winter wheat crops are also a concern in some former Soviet Union countries.
Wheat prices are relatively high. World wheat stocks have tightened up. More than sufficient wheat is and will be available to meet 2010-2011 marketing year demands. The key point is, if something happens to 2011-2012 marketing year world wheat production, tighter stocks will make 2011-2012 wheat marketing year prices significantly higher.
Producers who haven’t taken advantage of current prices should strongly consider selling some wheat. Also, hedging or forward contracting 2011 harvested wheat may also be a good idea.