Wheat growers wonder: Sell now, or later?
Marketing specialist said wheat prices probably will continue to decline
Prospects for wheat prices to rebound above the current $5.90 per bushel Portland delivered price don’t look good, given plunging stock markets and relatively good weather around the world.
Dan Steiner, a grain marketing specialist for both Pendleton Grain Growers and Morrow County Grain Growers, delivered that message Wednesday as areas growers were signing up to attend today’s video wheat marketing meetings being broadcast simultaneously at Oregon State University Extension offices across the state, including in Baker City.
In mid-August Steiner was advising growers to sell at least some of their wheat crop at the prices offered then — $8.40 a bushel for soft white wheat delivered to Portland, or the $9.25 September futures price.
At that time, Steiner reminded growers that, compared to historical wheat prices in the $3 to $5 range, $8.40 to $9.25 was a good price that would provide most growers with a profit, even after paying soaring costs for fuel, fertilizers and pesticides.
He also reminded growers that less than 2 percent of the nation’s wheat crop was available to sell when wheat prices peaked at $15 a bushel last January.
The Blatchfords, who grow wheat in Baker Valley, heeded Steiner’s advice and sold some of their wheat before October prices for soft white wheat, the predominant variety grown in Northeastern Oregon, plunged below $6 a bushel.
About 8,800 acres of wheat were planted in Baker County in 2007.
When the wheat harvest started earlier this year in the Columbia Basin, many farmers held off selling some of their 2008 crop to see whether rains would revive the Australian wheat crop or if a drought would persist and drive world wheat prices higher in a repeat of the record 2007 market.
Blatchford said he sold some of his wheat crop on the futures market in the $8 to $9 range. But now it looks as if he will be stuck selling some in the $5 to $6 per bushel range.
On Wednesday, Steiner said last year’s record wheat prices resulted from a perfect storm situation that’s not likely to be repeated for the 2008 marketing year, or in the foreseeable future.
Those factors included the drought that ruined Australia’s wheat crop, a poor U.S. corn crop, $4 a gallon gasoline and high demand for corn and other grains for ethanol production, which in turn boosted demand for wheat.
The American dollar’s declining value compared to other currencies and a booming global economy in which people all over the world had more money to spend on food affected wheat prices, as well.
For growers who haven’t sold all of their 2008 wheat yet, Steiner said the question is whether to sell today for $5.90 delivered to Portland (which after shipping costs translates to around $4.90 for Baker County growers) or hold out in the hope that prices will improve.
Steiner pointed to several factors that, from his view, indicate holding out for a higher price could be a mistake.
For one he cites the Baltic Freight Index, which has been a reliable indicator of price tends for various commodities.
A year ago, the Baltic Freight Index was 11,793 points, indicating the booming world trade in commodities and finished products at that time. As of Oct. 2, Steiner said, the Baltic Trade Index had plummeted to 2,990 points.
Those numbers indicate trouble still lies ahead for the global economy, which is not conducive to increasing wheat prices, Steiner said.
However, he said there is a bit of a silver lining, because the trade slump led shipping companies to reduce freight rates, which means it costs less to ship a bushel of wheat from the United States to the Pacific Rim, the Middle East, Africa and other export markets.
Steiner also points to the index market funds on the Chicago Exchange as an indicator to watch when deciding whether to sell wheat now or later.
“Last year, the index funds were pouring money into commodities. Now that commodity values are down, they are unloading them,” Steiner said.
During the earlier commodity buying frenzy, Steiner said investment firms and other buyers purchased futures for 800 million bushels of wheat on the Chicago Exchange, but the U.S. wheat crop is projected to come in at about 600 million bushels, “leaving investors holding 25 percent more paper than we have commodity.”
However, because weather conditions in Australia and elsewhere have boosted foreign wheat crops, and because foreign growers planted more acres to wheat hoping to cash in on a repeat of last year’s record prices, Steiner said the worldwide wheat supply exceeds demand.
“There is not enough demand in this market to absorb the supply that’s out there right now,” Steiner said.
He said investors who bought wheat futures at $8.40 in August are facing a $400 million combined loss at the current Chicago wheat price of $6.12. However, Steiner said he expects those futures prices to drop another dollar to around $5.12 a bushel.
“Because of all this extra paper that’s flying around, the Chicago futures are artificially high,” Steiner said.
“It’s like these guys who are trying to sell a house they bought for $250,000 that’s now worth $150,000,” he said.
While most of the signs he’s watching seem to indicate wheat prices could drop, Steiner said so many factors can affect global wheat prices that there’s always a ray of hope for those holding out for higher prices.
There’s a slim chance that some catastrophe such as a drought, untimely frost or devastating storm will hit some part of the world and cause wheat supplies to dip below global demand, but Steiner said he wouldn’t bet the farm on that happening.
Some growers are hoping the economy will suddenly improve and revive sagging demand for oil and gas, and possibly boost demand for grains used to produce ethanol, but again, Steiner doesn’t recommend anyone bank on that prospect either.
“You can hope things will change all you want, but is that realistic? Show me one technical reason why you think things will change,” Steiner said.
“Everybody is hoping wheat prices can’t go down any lower, but people forget two and a half years ago we were at $4 wheat,” Steiner said.
“There’s no way you are going to see anything like what happened last year, happen again,” Steiner said. “Other than short bumps or little rallies, I don’t think prices will improve until the economy starts to improve.”