Todd's Take

The Pain of Waiting on Wheat

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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This chart shows that over the past two decades, DTN's National HRW Wheat Index rarely traded below 65% (lower red dashed line) of USDA's estimated production cost. Wheat prices below production costs are undervalued, but it can take time to get higher offers. (DTN ProphetX chart)

While row crops make slow harvest progress across the Midwest, the next winter wheat crop is quietly being planted and emerging at its usual pace. According to USDA's latest Crop Progress report, 85% of U.S. winter wheat has been planted and 63% has emerged.

Unlike corn this spring, planting hasn't been the problem as much as getting paid for the wheat grown. Looking at USDA's Commodity Costs and Returns data (https://www.ers.usda.gov/…), it cost $261.82 an acre to produce winter wheat in the Prairie Gateway region in 2018, the home of hard red winter (HRW) wheat and more commonly known as the southwestern U.S. Plains.

Anyone who achieved the average 2019 winter wheat yield of 53.6 bushels per acre (bpa) would need a cash price of roughly $4.88 an acre just to break even; a price DTN's index of national cash HRW wheat hasn't seen since February. Thursday's close of $3.96 is not likely to motivate any expansion in winter wheat acres this year.

Practically speaking, the breakeven cost quoted above is theoretical, based on USDA estimates, and is a representative of the average for the region. Specific farm costs will vary and if the farm is fully owned, it helps lower the breakeven point.

Even so, we can look back the past 20 years at the relationship between DTN's National HRW Wheat Index and USDA's cost estimates and see historically it has been unusual for HRW wheat prices to trade at less than 65% of the breakeven price for very long.

Thursday's close of $3.96 means cash HRW wheat prices are 19% below our theoretical breakeven -- a tough spot for many producers. Coming off another year of record world wheat production with USDA estimating record high world ending wheat stocks, there is not much fundamental hope for significantly higher prices anytime soon.

This contrarian would like to suggest that fundamental hope -- or the lack of it in this case -- is overrated. I don't want to give the impression that I am a raging bull on wheat prices, because I'm not. But I would say from experience that when markets look as thoroughly bearish as this one does, prices are often near long-term support, and unexpected events do happen.

Technically speaking, here are a couple things to consider about DTN's National HRW Wheat Index. Prices only gained 7 cents in October, but because they are up from almost a two-year low in September, the monthly stochastic turned higher from an oversold condition.

Secondly, back on Sept. 6, I talked about how market prices rotate in my column titled, "When Things Turn Bearish" (https://www.dtnpf.com/…).

Since 1960, spot Chicago wheat futures have reached a six-month high at least once in 88% of the calendar years. DTN's HRW wheat index goes back to 2000 and has hit a six-month high in 80% of the calendar years, but did not in 2019. Currently, the six-month high for the HRW index is $4.67, a cash price that many producers would be glad to meet.

The painful truth is there are plenty of reasons to be bearish about HRW wheat, even at these low prices and managed futures funds being net short. Neither I nor anyone else can guarantee wheat growers a shot at a profitable price in early 2020, but given the market's contrarian history and tendency to regress to the mean, there are reasons to wait for a better selling opportunity this winter.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/CZ)

Todd Hultman