Welch on Wheat: Stocks Continue to Run Low as Crop Conditions Decline

    Market Situation

    Prospective Plantings and Grain Stocks. U.S. wheat stocks continue to run below last year and the five year average. Today’s stocks report indicated wheat in all positions of 1.055 billion bushels, just above the average trade guess of 1.042 billion.

    Wheat acreage was reported as 55.815 million. Trade expectations were for an increase over last year’s 56.156 million to 56.277. More critical to wheat production in 2014 than planted acres will be the deteriorating condition of much of the U.S. hard red winter wheat crop.

    Crop Condition Reports. The Texas wheat crop condition index fell another 6 points this week, down to 233 from 239. Compared to last week the percent rated as very poor is up 2, poor is up 2, fair is down 4; good and excellent are unchanged.

    wheat-scout-by-mace-bauer-fla-farmer-Tamos-Sapp-Fl-0601Wheat rated as very poor and poor in Kansas increased on the week from 21% to 25%; Oklahoma wheat in very poor and poor condition is 44% this week, up from 42% last week. The crop index of Southern Plains wheat is down 3 points to 281.

    Weather. Much of the hard red winter wheat production area has seen less than ½ inch of rain in March. Some areas received light amounts last week, followed immediately by winds of over 40 miles per hour. The precipitation forecast for the next 5 to 7 days calls for beneficial amounts (+0.5″) in many areas.

    Longer term, the Climate Prediction Center has activated the ENSO alert system and issued an “El Nino Watch”. The ENSO outlook calls for neutral conditions this spring as the three month average sea surface temperatures in the equatorial Pacific are expected to remain in the neutral zone. There is about a 50% chance of a return of El Nino this fall and an equal chance of normal rainfall in the April to June forecast.

    Commitment of Traders. The pace at which speculative funds are adding to bullish bets has slowed considerably going into today’s reports from USDA. Last Friday’s Commitment of Traders report from the CFTC for positions held as of March 25th showed hedge funds added 13,861 net long contracts compared to the week before; index funds were up 2,480 contracts. The price index was basically unchanged.

    The CFTC snapshot of the corn market on March 25th showed hedge funds adding modestly to net long positions, +7,422 contracts. Carry in the market was steady, offering 48% of the cost of commercial storage from March to May; still in the neutral zone (33%-67%). Hedge funds added another 4,187 long Kansas City Wheat contracts last week. The Kansas City Wheat market was still inverted with the May contract trading higher than the July.

    Marketing Strategies

    2014 Wheat Marketing Plan. I have priced 20% of insured wheat production for 2014. My marketing plan calls for pricing the final 20% in the April to mid-May time period. I am also keeping an eye on July 2015 wheat futures. If this rally continues and have sold all of my 2014 crop, I may take this opportunity to price another year out.

    I have created a table showing the impact of current hedging decisions for a hypothetical farm with 1,000 acres of wheat. This producer has an APH of 23 bushels and faces a normal basis of -$0.40 per bushel. The producer purchased a 65% revenue protection crop insurance policy and has hedged 2 contracts of wheat (10,000 bushels), one at $7.70 and one at $7.31½. Current production expectations are for just less than half a crop, 10 bushels per acre.

    The table shows wheat revenue from various risk management strategies using today’s closing price for the July KC wheat contract of $7.65¼.


    Table 1. Click Image to Enlarge

    Upcoming Reports/Events.
    April 7 – Crop Progress reports resume
    April 8 – Short-term Energy Outlook, EIA
    April 9 – WASDE
    April 25 – Cattle on Feed

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