A critical price level for the Kansas City Board of Trade December contract was $4. Once the price broke $4, it took only seven trading days for the price to increase another 60 cents. If the KCBT Dec price holds $4.60, the next critical price level is $5.
Increased volatility comes with higher price levels. When wheat cash prices were trading in the $2.40 to $2.90 price range, a 5-cent price move was considered a “big” move. Now wheat prices are moving 10 to 15 cents per day and a normal day’s price range is 5 to 6 cents.
At higher price levels, sellers are afraid to sell because of the potential for higher prices. Buyers are afraid not to buy for the same reason. This fear results in volatile prices and prices being bid too high.
When the psychology is reversed, prices will be declining, sellers will be afraid not to sell, buyers will be afraid to buy and prices will fall like a “safe out of an airplane.” The market between now and next June will be treacherous.
There are several important things to remember. The most important is that prices cannot be predicted. The market uses two things to determine price, information and analysis. Every day the market analyzes all available information. As new information becomes available, prices change.
Since “new information” and “analysis” are used to determine price, by definition, prices cannot be predicted because no one knows what the new information will be.
The market makes two mistakes. First, information is rarely known with certainty thus supply and/or demand may be over- or underestimated. Second, the information may be correct but the analysis wrong. Because of these errors, the market tends to under or over bid price and adjustments must be made.
Information driving prices are the Argentine and Australian wheat crops, planting conditions in the U.S. winter wheat area and wheat demand. Argentina’s wheat crop has been planted and crop conditions are average. Reports indicate that Argentine wheat producers are holding wheat longer than normal as a hedge against inflation.
Three major wheat production areas in Australia are experiencing drought conditions. Australia’s wheat production is predicted to be 735 million bushels compared to 882 million bushels last year.
Higher prices will result in both U.S. and foreign wheat producers planting more acres of wheat. United States and foreign wheat stocks are tight. Higher production in 2003 would result in increased stocks and lower prices.
However, if the 2003/04 U.S. and/or world wheat crop is below average, wheat prices could increase to the 1995/96 marketing year levels ($7). Not likely but possible.
Producers that still own wheat must show discipline in marketing. Dollar cost averaging works in investment buying only if it is also used in selling. Selling wheat overtime works well, too.
Decide when (date) you want to have all your wheat sold. Then set three or four dates to sell 25 to 33 percent of the wheat. For example, the wheat is to be sold by Jan. 1. Sell one-fourth on Sept. 24, Oct. 24, Nov. 21 and Dec. 30.
This may be the year to hold back a couple hundred bushels just in case wheat prices do reach $6 or $7. You wouldn’t want to miss the chance to sell $7 wheat. However, if prices do increase, there is always the 2003 crop to sell.