The Enid News and Eagle, Enid, OK

December 29, 2012

Weak demand causes grain market selloff

By Rodney Jones, Extended Forecast
Enid News and Eagle

ENID, Okla. — Extremely dry conditions continue to plague most of the U.S. wheat-producing region, yet old-crop wheat prices have fallen significantly over the past several weeks.

Looking at the bigger picture, global ending stocks at the end of the current marketing year are projected to be at comfortable levels, a projection that has not changed significantly over the past few months. There is tremendous uncertainty regarding 2013 wheat production in the U.S., and the questions and comments I get from local producers have been focusing on when the market will begin to pay attention to poor crop conditions.

There is no doubt, conditions are poor across a huge chunk of the U.S. wheat-growing area, with condition ratings the lowest on record in many areas and the drought situation continuing to worsen. However, to a large degree the market may have already factored in the current conditions. The July Kansas City wheat contract posted a high of over $9.46 per bushel in late-November. True, since that time the July contract price has fallen along with all other grain markets in the face of broader negative market news; however, the July contract price has not fallen as hard as the old-crop prices, indicating the market is certainly aware of poor new-crop growing conditions. Additional wheat crop condition news likely will not be a major market moving factor until later in the spring when the crop comes out of dormancy.

As has been the case for some time, wheat news will be trumped by news regarding corn crop potential. Improving conditions in the corn belt most certainly will trigger continued market declines based on projections for huge planted acres. On the other hand, continued dryness and less-than-ideal planting conditions could trigger a price rebound.

Since all of these weather projections (both for the corn crop and for the wheat crop) are so uncertain, the market recently has been focusing on information that is known. Unfortunately, much of that information has not been price friendly. The price negative news has primarily been on the demand side, triggering selloffs for both corn and soybeans that also impact the wheat market.

Most recently, U.S. soybean export demand has essentially collapsed, and weather reports from the South American growing regions have been favorable. Such news creates selling pressure for all the grains, which is amplified by year-end fund positioning, which can further distort markets in the short term.

Over the next few months, weather activity in the corn belt likely will influence all grain prices including wheat much more than weather in wheat county. As the spring evolves, news regarding wheat conditions may begin to play more of a role in price direction. This means continued extreme market volatility, and the associated heartburn that causes producers.

For those who have a significant portion of their expected production covered by a revenue-based insurance product, I don’t see the need to take any pricing action on 2013 wheat at this time given the production uncertainty.

The price guarantee in the insurance contract is higher than the local market is offering on those insured bushels. If prices rally significantly, or if local basis changes significantly, some pricing decisions might be warranted.

Jones is Oklahoma Cooperative Extension Service area agricultural economics specialist.