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Mackinzie Ledgerwood (5) was helping her dad, Brock Ledgerwood, check on a cow out in the wheat stubble on Ledgerwood Farms in Pomeroy, Wash.
Photo by Brock Ledgerwood





Around the world markets

AMMO workshop mixes economic grain outlook with marketing advice

March 2017
By Trista Crossley

What do you get when you mix a world economic grain outlook with marketing information? For attendees at the Agricultural Marketing and Management Organization’s second workshop of 2017, they walked away with a clear-eyed view of the current global wheat situation and how to determine whether an offered price is fair under current market conditions.

Mike Krueger, founder and president of The Money Farm, a grain marketing advisory service located in Fargo, N.D., covered the world production vs. demand portion of the workshop. He told the audience that while he thought the market had hit bottom for the year, there probably wasn’t much of an upside in the short run.

Randy Fortenbery, the Thomas B. Mick Endowed Chair in the School of Economic Sciences at Washington State University, talked about how producers should assess their price risk and use current and historical market information to start thinking about whether it’s a good time to consider a sale or not.

Where demand meets production

Mike Krueger tackled the state of the world’s wheat market by first talking about soybeans and corn, because, “…they are all interrelated. You can’t simply ignore what’s going on in that world.”

Soybean demand has continued to grow despite high prices. Part of the demand is because of China’s increasing imports due to an expanding middle class and the need to feed protein to poultry and hog herds. In the U.S., record yields haven’t hurt the export demand, and the result is a projected increase in soybean acreage to the tune of 5 to 6 million more acres, with most of that increase coming from areas that traditionally planted wheat or barley.

“What that means, to put it into perspective for a wheat guy in North Dakota, is he can sell new crop beans today at $9.50 a bushel,” Krueger explained. “He had awesome yields last year. He had good wheat yields too, but he sold that, for the most part, at $5 a bushel or less. I think we are going to lose up to a million acres of spring wheat, and a lot of that is going to go to soybeans.”

Corn has a similar story. Last year saw a record corn crop in the U.S. and across the world with increases in ethanol consumption and export demand. Again, nearly half of the world corn supply is in China. Krueger said U.S. farmers are holding onto corn and will need to start moving that supply, especially if the new crop gets off to a good start.

Having established the state of the soybean and corn markets, Krueger moved onto the wheat market. With four consecutive big wheat crops, especially in the Black Sea region, he noted that the world is awash in wheat, but that the bulk of that wheat is low quality and low protein. In the U.S. last year, the Plains states had a similar problem. Their crop was huge, but it was low protein with less-than-desirable milling and baking characteristics. Part of their problem, Krueger said, was that elevators in that part of the country aren’t checking protein levels or for falling numbers.

“Now they have a massive gob of crummy wheat, and that’s a problem,” he said. “I don’t know how they are going to move it. It is going to have to find its way into feed channels, but that hasn’t happened very quickly either.”

Krueger said one of the reasons U.S. wheat stocks have expanded so rapidly is because last year, exports were the worst they’ve been since the early 1970s.

“When you combine a super strong dollar, dirt cheap ocean freight weights and big supplies of wheat among all our competitors, it’s not good. It’s not good for us,” he explained. “Cheap ocean freight makes the world tiny because they can ship wheat from Russia or the Ukraine to Monterrey, Mexico, for almost nothing compared to what it was six, eight, ten years ago.”

Krueger said he thinks the 2017 world wheat production will be closer to 725 million tons with consumption hovering at 750 million tons. He predicted that the U.S. will produce 12 to 14 million tons less wheat simply due to reduced plantings. A lot also depends on how production in other countries goes, especially Australia, Canada and Russia. Some of the factors to consider in the upcoming crop year in terms of the U.S. wheat crop include:

• U.S. producers are losing money;
• U.S. winter wheat plantings will be down;
• U.S. winter wheat farmers are using less certified seed and lower fertilization rates to save money;
• We could see fewer total planted acres to all crops in 2017, not just in the U.S. but the world; and
• The U.S. should see a shift away from corn and wheat to oilseeds in 2017, with a similar shift in Canada.

Looking ahead, Krueger said based on current trends and U.S. Department of Agriculture numbers, he thinks the worst is over, but the wheat market won’t see a big rebound.

“The U.S. wheat situation is going to change. The extent that makes a difference for us in price will be dependent by class and on what happens for the demand for our wheat. That is dependent on what goes on in the rest of the world,” he said. “The good news is, I think in the parts of the world that we really rely on for demand, their economies are in awesome shape.”

Don’t lose a dime to make a nickel

It’s one of the biggest questions on producers’ minds—when to sell wheat? As Randy Fortenbery explained, it’s all about balancing how much risk a producer is willing to tolerate vs. how much to sell to keep the operation going and to sleep at night. The key, he said, is to know what a realistic price is.

“You should know about the price of production. You should know that for long-term planning. What is it going to take to stay in business?” he said. “But sometimes, the cost of production is irrelevant. Sometimes you are in a situation where the best you can do is minimize losses. You have to be realistic about what the market is offering or is likely to offer.”

Everybody in the grain chain, Fortenbery said, uses the futures market to manage their risk and determine what prices they can offer for forward cash contracts. Using historical data, he showed that in general, futures prices trend lower going into the corn harvest through the first of the next year before heading upward. So if a farmer decides to hold grain in September, “…you need to calculate what it is going to cost you to wait until March, April or May because that’s usually when you’ll finally see another price opportunity that’s better than the one you saw at harvest. It doesn’t always happen, but it happens pretty often.”

Another factor that can help producers is “basis.” Basis is the difference between cash prices and futures prices for the contract closest to expiration. Fortenbery said basis is much more predictable than prices, and producers who understand how basis behaves can use it to determine if a buyer is offering an attractive price given the market’s current condition.

“A lot of the times when we store grain, we are hoping the price goes up or we store it because we think the price isn’t as attractive as we would like it to be,” he explained. “Once you have grain out of the ground, you shouldn’t be thinking about the price in that way. It’s about a return on investment of storage costs, not betting whether the price is going to go up or go down.”

Producers also need to consider production risk.

“Often times, especially when prices are pretty good, we tend to overemphasize the production risk, and as a result, we take on more market risk than maybe we would really want to,” Fortenbery said. “What you really need to do is sit down and look at yields over a five to 10 year period. How often do you really get that big failure? Secondly, what is your protection against that? What kind of insurance product do you have, and can it help cover you so you can pay for the nondelivery (of contracted grain)? At what price is it worth taking that risk and giving up the price risk?”

Fortenbery closed out his presentation by talking about marketing plans. A good plan, he said, is a written one that identifies a producer’s specific price objectives as the production and/or storage season progresses. It identifies strategies available to achieve those price objectives. Plans should also be flexible so they can adapt to changing market conditions.

There are four factors that should influence a producer’s marketing plan:

• Personal feelings and attitudes about marketing;
• The financial needs of the business;
• Seasonal price patterns; and
• The current price outlook.

A marketing plan should result in a road map that lays out specific objectives. If an objective is satisfied, the producer made an excellent marketing decision regardless of what happens to prices later. It also establishes informed criteria for basing storage decisions and identifies exactly how much risk a producer is willing to tolerate.

Fortenbery’s website has years of marketing data from locations around the state that producers can look through, chart and compare.