A price swing of $1.20 in less than two weeks – what gives? Economists like Kim Anderson, Oklahoma State University grain marketing specialist, and James Welch, Texas AgriLife Extension grain marketing specialist, see numerous reasons why markets are so volatile. But there are also questions as to why there was a rally to start with.
“During the week of Oct. 19, the Kansas City Board of Trade (KCBT) December wheat contract increased 40¢/bu. and the price range was 69¢,” says Anderson. “Oct. 26-30, the contract price declined 51¢ and the price range was between $5.63 and $4.99. The December contract price is still above the $4.58 low that was set on Oct 5. The major price factor for the $4.58 to $5.77 price increase may have been index and hedge fund buying. The price decline may be due to producer and fund selling.”
Welch says the supply of world wheat “is adequate given current demand projections. As such, wheat prices will likely be more of a follower of other markets than a price leader.”
Jim Wiesemeyer, economist for Informa Economics, says fundamentals didn’t appear to play a role in wheat’s recent price increases. “There’s clearly enough wheat around the world to where you’re scratching your head about the recent rally,” he told Corn & Soybean Digest after speaking at last week’s Texas Cattle Feeders Association convention last week in Amarillo, TX.
“It could have been a quality protein problem, short term. But to most people, I think wheat is a follower due to the increase in not only production but carryover. I learned a long time ago that wheat is five crops (in type and quality). It depends on your class. You could have a definite line of demarcation in a class of wheat. If you’re in a protein-pull market and have good protein, you can get a pretty good price right now. I’d sell into the rally.”
Anderson says that if the December contract price stays above $5 early this week, the “price target” for growers will be $5.50. He points out that since Sept. 8, the Chicago Board of Trade (CBOT) December corn contract price increased from $3.02/bu. to a peak of $4.13. “The corn contract closed at $3.66 on Friday,” he says. “The $1.11 price increase was mostly fund buying and the 47¢ decline was mostly due to fund selling.
“It is interesting that market analyst reports seemed to switch from minor yield and quality impact for the wet October to a belief that yield and quality reduction may be significant. The general opinion appears to be that pipeline (marketable) corn supply may remain tight for the next month or so. But, total corn supply will be higher in 2009-2010 than in 2008-2009.”
He says there are also some concerns about delayed plantings of hard red winter and soft red winter wheat. “The problem with converting these concerns to higher prices is that hard red winter wheat ending stocks are expected to increase 138 million bushels in 2007-2008 to 354 million in 2009-2010,” he says. “Soft red winter wheat ending stocks are expected to increase from 55 million to 162 million. World wheat ending stocks are expected to increase to 6.9 billion bushels from 4.5 billion bushels.
“When world wheat stocks are 1.4 billion bushels above the five-year average, it is hard to get excited about wheat, or the lack of, that will be not be harvested until next June and July. If you can't risk lower prices, sell some or all of your wheat. If you have a marketing plan, continue to follow it. If you do not have a plan, consider selling some wheat on 20¢ rallies.”
He says prudent decision makers often spread risk over time, adding, however, that growers may want to sell their remaining wheat in November and early December because “there is now about 50¢ downside risk and 60¢ upside potential.”