Published: October 31, 2009 04:16 pm         

Volatility continues in wheat market

In addition to production concerns due to weather, area wheat producers continue to face marketing decision challenges.

The wheat futures market saw significant rally in a short time period, then fell back quickly. Cash markets and forward pricing opportunities also moved, but by lesser amounts. My recent focus has been on the negative underlying fundamental factors weighing on the grain markets. Recent price moves naturally lead one to ask whether market fundamentals are changing, perhaps in favor of a higher market outlook.

Let’s examine a few potential market movers.

Two weather-related factors are cited as having the potential to lead to higher grain prices in the near future. First, wheat planting is delayed across the United States due to wet conditions. This is a real issue, both in the context of full-season wheat plantings and plantings intended to follow other crops, such as corn or soybeans, which are experiencing harvest delays. The argument is delayed plantings or abandoned planting intentions will reduce 2010 wheat production.

True, but remember there already are large projected ending stocks of wheat in both the United States and around the world from large 2008 and 2009 crops. There is no danger of running out of free stocks of wheat, as occurred at the end of the 2007 marketing year. Delayed planting could result in a slight price rally, but not likely the kind of price rally seen a few years ago.

Second, the fall crop harvest is delayed in corn country and other regions. The argument is delayed harvest eventually will result in lower yields or quality issues. Historically, delayed harvest rarely has impacted final yields, and so far the harvest reports confirm high yields. However, delayed soybean harvest in the delta region of the country is beginning to result in some crop damage. How much of a market driver the delayed fall crop harvest ends up being remains to be seen; however, at this time I would not count on a sustained wheat market rally as a result of the fall crop harvest issues.

Two broader economic factors also have been credited for potentially sustaining a grain price rally. The value of the dollar has declined relative to other world currencies. Arguably, this should stimulate export business for grains. In reality, we have not yet witnessed a significant boost in wheat export business. There simply may be more of a delay in timing than expected; however, with ample world wheat supplies it may be difficult to generate the level of export business needed to support this wheat market.

Finally, some argue there has been a general commodity price rally as investors sought a hedge against inflation. There could be merit to this argument if inflation were in fact on the immediate horizon. Latest economic indicators suggest inflation is still in check, suggesting an inflation-induced commodity price rally may be premature.

As a final thought, during the recent futures market rally in all the grains, basis widened across a large geographic area (cash prices have not increased as much as futures prices). The market participants who actually trade grain are not as concerned about the supply-demand situation as the recent futures market action would suggest. This provides another reason for caution regarding the overall grain market strength. I continue to look at the fundamentals. There is plenty of wheat (and other grain) around, and until I see real production shortfalls I view short-term price rallies as selling opportunities.



Jones is Oklahoma Cooperative Extension Service area agricultural economics specialist.