Wheat Prices on Verge of Taking Off

Wheat prices have made a significant turnaround in recent weeks, as continued dry weather in major wheat-exporting countries worldwide are providing underlying support. As of this writing, prices have reached their highest levels in over a year. This has been universal on all three U.S. exchanges: Chicago (soft red winter wheat), Kansas City (hard red winter wheat), and Minneapolis (hard red spring wheat). All three varieties are on the rise, gaining over 25% in value.

Harvest is winding down, with over 90% of the hard and soft red winter wheat already harvested. Once harvest is complete, farmer selling usually shuts off unless prices rally. Spring wheat was off to a great start with high crop ratings. However, it is currently struggling with drier growing conditions in recent weeks, suggesting yield may not measure up to expectations. Elsewhere, Europe has been embroiled in a drought, and areas of Ukraine and Russia's Black Sea region have suffered from drier-than-normal conditions. India and Australia are reportedly turning drier, which has also provided underlying support. Holding back wheat prices is the fact that the world has had a gluttonous supply. However, projected inventories are quickly declining. The world stocks-to-use figure for exportable countries is precariously small and now at a decade-low level.

The implication for U.S. producers is to create a balancing act between selling old-crop inventory and starting new-crop sales and being able to participate in a price rally. The key is to reward the market through hedges, forward sales, and the use of puts. If using hedge-to-arrive or hedges (short futures), purchase call options to manage these positions. Calls provide the right to own futures (not the obligation). For new crop, consider forward selling, hedge-to-arrive contracts, or short futures. Utilize July calls or bull call spreads to cover these sales. For spring wheat, use Minneapolis options to cover both old- and new-crop sales.

Volatility in the wheat complex is on the rise, with speculative money going from net short most of the year to net long in recent weeks. This is a significant event, considering managed money has generally spent the last five years to the negative side (that is, short wheat futures). This turnaround signifies that the commodity complex may be ready to make a move higher, as low prices are carrying low prices through bigger demand and now some weather adversities that could affect supply.

Bottom line: wheat prices are on the verge of taking off. Have a balanced approach to manage your decisions, whichever way they decide to go.

If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129, or ask for Bryan Doherty.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.