Wheat Markets in Hindsight (A Contrarian View)

August 12, 2017

Brian Wittal of Pro Com Marketing recently took a “hindsight 20-20” look at when you should’ve priced your wheat. [1]

I’m taking it a step further than his simple “you could’ve done this” or “you could’ve done that.”

I’m going to explore the question: why?

Why wouldn’t you price out new crop wheat this winter or spring or even summer?

Some will say, “I don’t sell something I don’t have,” or “the price is too low.”

For me, it was the latter argument.

Logically, why would I forward contract anything at a price that’s a multi-year low?

Let’s look at some of the facts about the growth of the 2017/18 crop.

  1. Wheat prices in fall 2016 and winter 2017 were trading sideways to lower;
  2. Global record production and carryout;
  3. Demand was growing slightly but not like production’s moon shot over the last four years.

Thus, all pre-seeding estimates were showing fewer wheat acres in 2017/18 than 2016/17.

Aha!

A contrarian indicator!

Wait…What’s that?

A contrarian indicator suggests that something is going to do the opposite of what everyone is thinking.

Simply put, contrarians don’t follow the herd.

A contrarian would be one who planted more wheat in 2017/18, not less. (I was one such contrarian).

At the time, the market had been priced in the global record carryout.

With acres going lower, carryout had to head lower, right?

Yes, there was the possibility that we might produce another record crop but the likelihood, especially with less acreage, it seemed unlikely.

Thus, lower prices seemed implausible.

Bullish Wheat Catalysts

Ultimately, over the first six months of 2017, there continued to be more bullish catalysts than downside risks.

Lower acreage was the first,

Second, markets also expected the planting of fewer corn acres in spring 2017. After a record crop in 2016/17, corn farmers were pulling back on the area planted for the grain. This would suggest that there would be less corn to compete with wheat

Bullish catalyst number three: feed substitution effects. With higher corn prices, livestock feed buyers might consider switching from corn to wheat. However, this third factor is losing its luster lately.

Why?

If you caught my in-depth recap of the August WASDE, you’d know that there’s a lot of corn available right now though so this factor is losing its relativity.

Fourth, the available supply of higher quality wheat was hard to track 9 – 12 months in North America.

We know that the US 2016/17 high-protein wheat crop was snapped up fairly readily. This limited Canadian exports and has left farmers in the Great White North with a sizeable amount of decent-quality crop in their bins.

Fifth, drought. No one wants to be hit by it, but it always drives prices higher.

Now, leveraging on that last point, in grain markets, we tend to see higher prices start to lose their prices when mainstream media starts to cover it. For example, in 2012, CNBC was doing “Drought Watch” specials. By then, the highs of the market had been priced in.

You can think of the mainstream media as another contrarian indicator.

Simple rule: Once mainstream media reports on grain market factors, said factor was already priced in before their report.

When Should Your Price New Crop Wheat?

So, why would you price in anything before you seeded it? For wheat, it didn’t make sense to really.

However, once you saw the rally in June and early July, you’d be silly not to start looking at those prices as selling opportunities.

If you say you don’t sell something until you have it in the bin, I think that’s not risk management.

I’m not telling you to sell all of your crops.

Just some!

We regularly see farmers selling their grain through FarmLead in 5 – 10% increments.

Have you any of those 10% blocks posted on FarmLead?

Try it out.

It’s easy and free.

Why is it okay to pre-sell some wheat? There’s a high likelihood that you are going to produce at least 10% of your crop. If you know over the past five years, you’ve averaged at least a 13% or better protein wheat, how can you not consider selling some?

Cue the crows on the line, who shout from the high-wire they’re sitting on: “the price could go higher!”

Okay.

If they do, you only sold 10% of your expected production.

You still have the other 90%.

Maybe there’s some weather situation, and you only take off 50% of your expected production. This would suggest that 10% of the volume that you sold is now actually 20% of production.

If you’re still following the math, this would mean you still have 80% of that production left (or 40% of what you were initially expecting).
Timing Your Next Wheat Sale

As I alluded to in a Twitter conversation the other day I briefly participated in, those who continue to wait for high prices tend to be those who don’t end up selling in the top 20%. [2]

With volatility in prices, sales timing becomes pretty difficult.

In their latest quarterly earnings report call, Bunge CEO Soren Schroeder, maybe sums up the sale reluctance maybe best: “The size of the mismatch between farmer pricing and industry commitments is unprecedented and challenges the traditional wisdom of farmer marketing patterns.” [3]

Soren telling the market that the farmer is being irrational and holding onto grain with the expectation that prices are going higher no matter what.

For the wheat market, wheat prices in late June / early July sat multi-year highs. We went from multi-year lows to multi-year highs in a matter of about eight weeks!

As such, the likelihood that prices were going to pull back became greater that prices were going to go even higher. This is the opposite of where we were sitting in winter 2017. Just six to nine months ago, the likelihood that wheat prices were going to go higher was greater than them heading lower.

The challenge now is that we’re getting into harvest time. This means more bearish price pressures. To sell your wheat successfully in this 2017/18 marketing year, you’ll need to do two things:

  1. Get your wheat tested! (We have an awesome new tool coming out next week to help you with this)
  2. Once you have your quality specs, shop it around. You can email test results, but you should also post those specs on FarmLead with a 5 – 10% lot.

Takeaways

The market is the market. Unfortunately, it doesn’t care about your expectations for grain prices. I learned this a long time ago in my Wall Street days. Understanding the risks and potential price inclines or declines is more important.

In fact, you can see how I compare the price risk management practices of a hedge fund manager against a farmer in a three-part blog post I wrote back in February 2017.

Ultimately, here’s a few things to take with you once you’re done reading

  1. Sell into strength
  2. You don’t know if the market will go down or go up. You can, however, understand if the market is more likely to move one way or another (read: contrarian indicators)
  3. Look for contrarian indicators. There are opportunities when you’re not following the herd.

Speaking of being a contrarian, I started FarmLead because I was tired of the status quo process of selling grain.

Submit samples to the elevator…

Wait for a bid…

Post a target with one company…

Have it hit to only miss out on a better opportunity elsewhere…

Repeat.

My goal in starting this company was to help you with only a few of your sales a year and make more money on those. The majority of the time you’ll be able to find a great price from the local elevator.

Just like you, our family’s farms depend on these local relationships. However, when it comes to selling grain, that local option isn’t necessarily always the best. You know it, and the local elevator knows that.

There’s no love lost- it’s just the way it is.

As such, I invite you to post some grain on FarmLead to see if we can help you with that handful of sales that are going to put more money in your pocket.

To growth,

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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