The Times - Serving Waitsburg, Dayton and the Touchet Valley

If you own wheat in storage right now, you are probably holding it because you think it will be more valuable later or because you want to minimize your taxes. Some may just get a warm feeling all over to think of it sitting in that bin; a valid incentive but difficult to account for in bookkeeping.

There are other reasons, but there is no denying that it costs something to hold onto the stuff. Storage rates and interest costs on borrowed funds are the two most obvious holes in the bucket.

Then there is the risk. “Market Risk” is the reality that wheat may decline in value over the next few days weeks or months. Of course it may also increase in value, but speculation on wheat price movement is an activity that often does not serve business purposes very well, although we all try very hard to gauge the market direction and speed in order to take advantage of it if possible.

There are ways to take advantage of your best estimate on market price movements, but holding onto stored wheat is among the most inefficient, often costing far more than it yields. Do not give up on being aware of the price trend! Just make sure you have a planned approach with reasoned targets and limits. Your broker or advisor will want to talk about “Risk Tolerance”, but that is a little vague. “How much are you willing to lose?” is not a question that yields a functional answer.

The real questions we all have to answer for every financial decision are: What is your expected return for a given position or strategy? What is your time frame for conclusion and how much risk do you anticipate? How will you know when it is time to change positions? What will be your response to various possibilities, including both success and failure? If you have these answers you have a chance, otherwise the odds are not good over the long haul.

Wheat prices are at a pause. The low end of the recent market movement in Chicago wheat futures is around $4.96 in the May contract. At the close of Tuesday’s trade, that contract was at $5.03, just 7 cents above the recent low and 14 cents above life-of-contract lows that were established back in September of 2014.

The big trend line is negative, although there is a test of that line underway since the first week of February. If we see the price trading below the lows mentioned above, it will be a confirmation of the lower trend. Meanwhile the market is trading sideways in a range between $4.96 and $5.32. A movement outside of that range will attract attention and will be worth observing.

The World Wheat Stocks to Usage ratio produced by the USDA on February 10 shows the fourth highest number in the last twelve years. It is the third year in a row of increase wheat supply versus usage.

The world wheat supply is a record large, and foreign wheat production is the source. These are not the fundamentals of big wheat price rallies!

The high prices of the last few years have done their work, as everyone who could has planted wheat. This is a self-correcting problem, but it will take another year or more before this setup can change much. The price picture is weak.

The market will be looking for spring weather problems to support rallies, any response is likely to add volatility rather than trumping the effects of supply v. demand. As always, your risk tolerance evaluation, and thusly your financial goals, are best met in knowing the trend.

Information and opinions contained herein come from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital.