Are Wheat Prices Close to a Bottom?

What’s Happened….

Wheat prices on all three futures exchanges, Chicago, Kansas City, and Minneapolis are either at or near low prices for the year. At the same time, world wheat supply and demand numbers look somewhat supportive. Prospects for another record crop in Russia (world’s largest exporter) are slim with 37% of the crop said to be rated as poor, according to reports citing a top Russian official in early December. Russia and Ukraine meet roughly one third of the world’s needs, and the continued war between Russian and Ukraine threatens the flow of wheat to the world. The obvious question is, after nearly two and a half years of trending lower, are wheat prices close to a low? 

Why this is Important….

Farmers who are storing wheat need to decide whether they want to continue to pay the costs associated with storing wheat deep into the winter months, or at least explore alternatives to storing. The costs associated with storage include storage, insurance, and interest. Some might argue there is little to no cost for on-farm storage. Let’s just say that topic can be debated. Commercial storage and interest on borrowed money or the opportunity cost of money is, however, real. Nonetheless, cash flow needs and the lack of a rally in wheat prices are keeping farmers who stored wheat on edge. So far, the risk of storing the 2024 crop has not paid dividends.  

A lack of snow cover and the coldest temperatures soon engulfing the Wheat Belt are additional concerns beyond limited supply from the Black Sea region. Is it just a matter of time before wheat prices rally? So far, the investment community has not jumped in as buyers. The most recent Commitment of Traders report indicates managed money holds a net short position of just over 87,000 contracts. Because the market’s response to positive fundamentals is lacking, this brings us back to the question of what to do with stored wheat when supply and demand numbers look potentially friendly.  

What can you do about it?

There are approaches one can take to stay in the market. The first is to continue to hold wheat in storage. You can benefit from an increase in price, basis, or both. The risk, as discussed above, is price, basis, and storage costs. A second approach is to sell cash wheat and retain ownership by buying futures. You eliminate storage cost and basis risk/gain, yet are still subject to market risk. A third approach is to keep what is in storage and purchase a put to provide a price floor. Premium cost is a consideration. Finally, a fourth approach is to sell wheat and purchase a call option. Here again, premium and the amount of time to buy are considerations, yet all risks are defined and the potential to participate in a price rally is real. The premium for the call option is a consideration, as is the time horizon you wish to remain an owner.  

Each of these approaches should be discussed with your advisor so that you can find the best fit for you. For many, continuing to store is the right approach because it is simple and visible. Keep in mind that your risk is not defined. Ask lots of questions and make sure they are answered before you incorporate any strategy. 

Find out what works for you….

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally charged responses to market moves, which are always dynamic. 

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions. 

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation. 

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Bryan Doherty