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Wheat blast off
Wheat has blasted off into the stratosphere this week, blowing above $8 futures
and coming very close to trading at near the same price level as soybeans (8.32
Sept. CBOT wheat and 8.90 Sept. soybeans).
This is an extremely unusual
situation as speculative/hedge funds own 1.3 billion bushels of wheat futures
and importers are scrambling to buy US wheat (India, Egypt, and Iraq) due to
worries about shortages. This is the 'perfect storm' for wheat as we enter the
beginning of September - planting time for US winter wheat. This should attract
more 2008 acreage as July08 futures are trading above $6.25 for the first time
ever for new crop at winter wheat planting time. Markets are concerned about
dryness in Australia (which has been mostly dry the past month except eastern
areas. Argentina is also getting attention, but actually southern Argentine
wheat areas are forecast to get some decent rains (above average) over the next
Producers have to start looking at wheat again as being more attractive than
corn/soybeans in traditional wheat growing areas (KS, ND, SD, MN, OK, TX). This
should attract a lot more acres of wheat not only in the US, but worldwide, as
the winter wheat planting season unwinds. Producers have a much different
decision to make for 2008 planting, as we now are talking about $6 wheat, $3.50
cash corn, and $8 cash soybeans. I suspect that wheat will come back into favor
for many producers in traditional wheat country!
Corn and soybean prices have struggled more the past few weeks, trying to rise
with the wheat market but held back by indications that the US crop has been
getting larger each week due to improving weather. Rains rescued central and
northern corn belt crops just in time in August, with improvements in crop yield
potential the last 3 weeks nationally. This week our yield models suggest
another 2 bu/acre in corn yield (to over 155 bu/acre) and a 0.25+ bu/acre
improvement in soybeans (now nearing 42.5 bu/acre). The bean yield is about 1
bu/acre over USDA while the corn is 2 bu/acre above it. That's in spite of some
areas that are still under dry conditions (KY, TN, Delta, southern IND/OH).
Overall, if conditions keep improving at the recent pace, we might approach
record large corn/bean yields yet in 2007.
For producers with the capability of raising wheat (and especially those who
prefer to raise wheat), it's a decent time to advance sales of 2008 wheat,
either by buying puts, selling futures (in futures fix contracts), or by selling
calls. For now, premiums are so high that selling calls looks like the favorite
thing to do, while the crop is being threatened elsewhere. $8 July CBOT calls
sold this week for 20c, while $7.40 CBOT July08 calls sold for 32c. Producers
with land that can switch from other crops to wheat can consider selling both
$7.40's and $8 on land that is more profitable in wheat production (at these
strike prices) than on other crops (including corn/soybeans).
If new crop wheat prices rise up to $7.40 or $8 levels (to make these at-the-
money calls), then you simply lock that price and plant the wheat on those
'flex' acres. If not, then you collect this wheat premium on your 'flex' land,
and plant it to soybeans or corn. This simply is a way to make the most money
on your 'flex' acres, by shifting it to the crop the market demands - which right
now is wheat. After all, farmers should be as worried about making the most
money on their land/machinery base, not so much on picking tops in markets.
Wheat has blasted off into the stratosphere this week, blowing above $8 futures and coming very close to trading at near the same price level as soybeans (8.32 Sept. CBOT wheat and 8.90 Sept. soybeans).