NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
May 21, 1998
George Flaskerud, Extension Crops Economist
NDSU Extension Service
USDA projected seasonal average farm wheat price of $3.05-$3.45 in its Supply and Demand Report released May 12. This projection was supported by spring wheat cash forward contract bids of $3.25-$3.45 for harvest delivery in North Dakota as of May 15. Many unforseen events can occur before harvest, but substantial changes would have to take place in the fundamentals for any significant improvement in the price outlook for this next marketing year beginning June 1.
Wheat stocks at the end of the 1998-99 marketing year are projected to be the same as during the marketing year just being competed, 766 million bushels or 31 percent of total use. Production of all wheat is projected to be down but larger carryover stocks will result in a supply that increases by the same amount as the increase in total use.
Winter wheat production was projected to be 1,706 million bushels, which implies a total spring wheat crop about equal to a year ago. Yields comparable to those in 1996 would produce a hard red spring wheat crop of 495 million bushels, slightly smaller than a year ago (501 million), and a durum crop of 93 million bushels, slightly larger than a year ago (86 million).
This price outlook based on normal yields is dismal, and it can get worse. Suppose good yields were achieved such as in 1992. In that year, the average August and September spring wheat price in North Dakota was $3.09. There is downside price risk even from mid-May prices.
So what should be done now? It's difficult to get excited about contracting or buying put options today at these price levels. A $3.60 put option in Minneapolis September futures would have cost about $.14 on May 18. With a minus $.30 basis, the local minimum selling price would be $3.16. A month from now, if the futures price is still $3.64, the $3.60 put option would probably cost about $.11, and the minimum selling price would be $3.19. If the wheat crop looks good at that time, buying a put option may be the best strategy since time for a rally would be running out and the price risk could be substantial.
If weather should rally prices, a downward-sloping trend line on the Minneapolis September futures contract would make $3.90 a logical price objective. If this should happen about mid-June, a $3.90 September put option would probably cost about $.14, and with a minus $.30 basis, the local minimum selling price would be $3.46. The Canadian Prairies remain dry, a concern since world wheat stocks are tighter than in the United States World stocks are projected to be 22 percent of total use at the end of 1998-99.
If the price goes down instead of remaining constant or rallying, the decision becomes whether to sell, sell on a contract, sell and buy a call, or store. The decision will depend on the cost of a call option, the basis at harvest and the carrying charge in the futures market between different contract months. The Minneapolis HRS futures market is not sending a signal today to store, but that can change. The sell-store decision will be more fully evaluated closer to harvest.
In contrast to the Minneapolis market, the Chicago and Kansas City futures markets are sending a signal to store. That will help support the wheat market.
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Source: George Flaskerud (701) 231-7377
Editor: Barry Brissman (701) 231-7866