Kub's Den

Gut Slot Low? Not Necessarily

Elaine Kub
By  Elaine Kub , Contributing Analyst
Unlike the new-crop corn and soybean markets, there is no specific season when the July HRW wheat futures contracts are most likely to hit an annual high or low. (DTN photo illustration by Elaine Kub)

We live our lives in the ebb and flow of seasons and phases. Monday was the June solstice, the first day of summer, and we can confidently predict that every subsequent day will gradually have two to three fewer minutes of daylight, until Dec. 21 when those days start to lengthen again.

We can also predict, with some confidence, that as long as there are no weather disasters and the U.S. grows an adequately huge crop, the prices for corn and soybeans will be lower at harvest than they are today. Those markets tend to ebb toward a harvest low.

Wheat, though ... oh, wheat. We can predict that the swarm of harvesting crews will roll gradually northward about 12 miles each day from the end of May to the middle of August, covering a thousand miles from Texas to Idaho, going town by town and plugging up the local elevators' ability to hold all that warm, sweet-smelling winter wheat.

Elevator folks call that time "the gut slot of harvest," and it's surely apt in 2016 when winter wheat yields are expected to average 50.5 bushels per acre -- far and away a record-breaking performance. That's 7% higher than the previous record set in 2013, and so far harvest reports seem to bear out the expectation with both superior yield and test weight numbers. Individual local markets may reflect the burden of oversupply with weak seasonal basis bids, but curiously, the underlying winter wheat futures markets themselves don't seem to ebb into harvest lows when the actual harvest arrives.

Neither do they seem to price in annual highs during the timeframes when the U.S. crop faces the most agronomic risk. That's what the corn market and the soybean market do (in "normal" years, anyway), and it gives the task of pre-harvest hedging a little predictability and rhythm. Past examinations of historical data have borne out the idea that, in years of normal or large crop size, corn and soybean farmers should sell in the spring or summer and avoid selling at harvest. Or in short-crop years, they might reasonably expect an annual high at harvest-time.

Does the wheat market also have some nice, steady rule of thumb like that? I wanted to know, so I gathered up the daily price data from the past ten years' worth of new-crop July KC wheat futures contracts, the ones against which the physical hard red winter wheat market hedges its yearly needs. Each year's data showed one annual high and one annual low, and I tracked only the dates of those inflection points, not the price levels themselves or the strength of the rallies that led up to the highs, so that no one year's data could outweigh the others. By plotting those dates on a timeline and looking for statistical clusters, I hoped to answer these questions: In any given year leading up to a hard red winter wheat harvest, which of those 250 trading dates has the highest likelihood of seeing the upcoming July futures contract's annual high? What time of year is best for locking in a price for the wheat a farmer will harvest?

Well, the result, as you can see above, is gobbledygook. There is no apparent season when the wheat market's annual highs tend to cluster. From this admittedly small batch of data, new-crop KC wheat futures seem as likely to hit an annual high in December, when the crop is dormant and faces no risk, as it is to do so in March, when the crop might freeze.

There does appear to be a high probability of some inflection point in either May or July, but it's as likely to be an annual peak as a trough. Yes, I tried sorting them into short-crop years (when we would expect panicky buyers to get bullish in June and July) and heavy supply years (when we would expect gut-slot lows), but still the May and July inflection points had a 50/50 chance of pointing either higher or lower. There didn't appear to be any fundamental relationship to the status of the U.S. crop.

The July 2016 KC wheat futures contract just hit a fresh low on Tuesday, $4.34 1/2, which would seem to match the loose cluster of annual lows in the May/June/July timeframe. Most of those occurred during years of normal or notably large production, but not all of them. Short-crop years, like 2013's sudden 25% cut in hard red winter wheat production compared to the year before, can also experience an annual low in July. It leaves the whole thing feeling rather random.

The likely reason behind this randomness doesn't solve the problem of when to market the wheat. Compared to corn or soybeans, the wheat market is much more flexible in finding substitutable supplies. Millers can blend in other varieties or seek the wheat from somewhere other than the United States. Elevators tend to be eager to put the crop in storage. Thus, the whole system tends to be less sensitive to the prospects of any one region's production at any one point in time.

Consider this: In late June while the favorable U.S. winter wheat harvest is in the early middle of its progress, Canada's spring wheat is dependent on timely rains, wet European wheat fields are expected to be harvested late amid lodging and disease concerns, Russia is ramping up to start harvesting its best-ever wheat crop next month, and meanwhile Australia has had favorable rains to get its newly-planted wheat crop started.

This global diversification of risk means there is no single, clear seasonal prescription for when to expect high prices, or when to do some pre-harvest hedging or harvest-time or post-harvest sales. It's a guessing game; one timeframe may be as good as any other, as long as the outside markets are favorable. Of course, those outside markets are a guessing game unto themselves, especially this week, with volatility expected in Britain's pound sterling, the Euro, and the U.S. dollar.

I'm aware that this column hasn't been able to provide an answer that's practical or helpful, but I suppose we'll have to console ourselves that even if we don't know how the wheat prices will churn, we do know the sun will rise, the seasons will change, and it always rains after a dry spell.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(CZ/)

Elaine Kub