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Wheat blast off

Agriculture.com Staff 02/09/2016 @ 9:55am

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 week.

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).

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