Marketing: The wheat alternative
By Matt Mattke
Dairy producers incorporating a significant amount of wheat in their feed rations should prepare for another wave of higher prices
Dairy producers pay greatest attention to the price movements of corn, soybean meal and byproducts of those feedstuffs, since they comprise the bulk of the cows’ ration. The severity of this summer’s drought and the impact it has had on feed prices, quality and availability has caused dairy producers to incorporate other feedstuffs into their cows’ diets, including wheat.
Since July, the price of wheat has been relatively stable, trading mostly sideways between about $9.25/bushel and $8.50/bushel (at the time this column was written in early November, December wheat was trading at $8.73/bushel).
This four-month sideways trading range is at risk of coming to an end though. Here are some factors suggesting an increasing risk of another leg higher in the wheat market between now and March 2013.
1) One factor is the crop’s condition. Since USDA began tracking it back in 1956, the winter wheat crop is in the worst condition it has ever been in for this time of year. Currently, just 39% of the wheat crop is rated in good-to-excellent condition, vs. 45% last year and 58% for the 10-year average. Three of the top five winter wheat-producing states – Kansas, Oklahoma and Colorado, which produced 37% of the 2012 winter wheat crop – are still experiencing significant drought conditions. Acreage in those three states classified as being in “extreme” to “exceptional” drought condition are: Kansas – 78%; Oklahoma – 68%; and Colorado – 51%.
2) A second factor is the relative value of wheat. The front month winter wheat futures contract (December 2012) is only 1.18 times the price of the front month corn contract (see Figure 1). As of early November, December 2012 wheat was trading at $8.73/bushel, with December 2012 corn trading at $7.39/bushel. A ratio below 1.20 means wheat is significantly undervalued relative to corn.
Historically, when the ratio gets below 1.20, it eventually works its way back to at least 1.60. If corn continues to hold at $7.39/bushel, a ratio of 1.60 would equate to $11.82/bushel wheat. If corn fell to $6.00/bushel, a 1.60 ratio would still equate to $9.60/bushel wheat.
3) Another factor is the current technical picture setting up on the charts. The current wave count puts wheat on Wave 4 (see Figure 2). Typically, bull trends play out in five wave patterns, and that means if wheat is indeed on Wave 4, there is one more wave higher to come.
Figure 2 shows the wave count and the price action since the move higher first began in May. The potential upside objectives for Wave 5 come by adding the length of Wave 1 to the bottom of Wave 4, and by adding the length of Wave 3 to the bottom of Wave 4. The two price projections from each of these would currently point to $9.70/bushel wheat or $11.80/bushel wheat, assuming the Wave 4 low is already in.
Bottom line, for dairy producers incorporating a significant amount of wheat in their feed rations, it would be a good idea to look at ways to protect the upside for the next six to nine months of usage. Forward contracting the physical wheat through the local supplier, or buying futures or call options in a hedge account, are ways to protect against another move higher in the wheat price.