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Using wheat as a guide

Agriculture.com Staff 02/07/2008 @ 3:50pm

The locked limit up price action in Minneapolis wheat has started a discussion about what could happen this summer if corn and soybeans futures get into some sort of weather market.

The Minneapolis wheat contract has been affected by end user demand, exports and the battle for acres. Price action certainly looks like a short squeeze. With demand for high quality milling wheat basically inelastic (price is unable to significantly reduce demand), no one really knows how much the last bushel of this type of wheat is worth before the next harvest.

Cash basis levels for spring wheat also support the theory that end users will pay higher and higher prices for any remaining supplies. Cash wheat trades without limits. Based on one set of cash wheat prices, it appears basis levels are up $1.25 in the past six days and futures are up $1.80. So cash spring wheat of milling quality is up $3.05 in the past six days.

Corn and soybean demand may not be that inelastic, but it pays to think now about what could happen during some large price swings during the hot summer months. Elevators may continue to be strained under the weight of massive margin requirements to hold farmer (and house) hedges. Emotions will run amuck during the hottest spell of weather in July or August.

It’s easy to say that everyone will stay calm, but that’s not going to happen! So here are personal questions to consider. What is your marketing plan? What will you do if you feel your production is shrinking due to weather? Will you buy options to be able to sleep at night? Will you have unpriced bushels to sell during the summer? Have a discussion with yourself about your potential reaction to $3.00 moves in corn or $5.00 moves in soybeans.

The USDA will release updated supply and demand tables tomorrow morning. Compared to all the data released in January, this report will be tame. The USDA will update South American crop sizes, although any changes will be small. In addition, many are looking for small increases in US exports for corn, soybeans and wheat.

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading in suitable for you in light of your financial situation.

The locked limit up price action in Minneapolis wheat has started a discussion about what could happen this summer if corn and soybeans futures get into some sort of weather market.

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