Wheat Marketing and Risk Management

Wheatheart Wheat Conference

Perryton, TexasAugust 13, 2009

Mark WelchGrain Marketing Economist

Hang on or let go?

Market Drivers

“Without the runaway demand growth of ethanol, many of the recent stories need to be rewritten in short order.” --Michael Swanson, Economics Department, Wells Fargo

Pumping ethanol from corn in 1933

• Economy• Demand

– Exports– Feed– Food

• Supply– Export

Competition– Planted Acres– Weather

FEARFlat

Adequate

Value of Wheat in a Loaf of Bread

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

$0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 $1.00 $1.10 $1.20 $1.30 $1.40 $1.50

Price of Bread Value of Wheat Avg U.S., white bread, 1-lb loaf KC HRW, Ordinary Protein

1980 2009$0.51 Average Price of a Loaf of Bread $1.40$4.25 Average Price of Wheat $6.63$0.06 Value of Wheat in a Loaf of Bread $0.09$0.46 Value of Other Factors in a Loaf of Bread $1.31 11% Value of Wheat in a Loaf of Bread, % 6%

Global Economic Growth

-6-4-202468

1019

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

14

Perc

ent C

hang

e

Advanced Economies Emerging and Developing Economies World

Real GDP Growth, 1980 - 2014

As of April 2009

Source: http://www.imf.org/external/datamapper/index.php; 2009-2014 projections

Global economic growth is being driven by developing nations.

World Per Capita Grain Use

1970

/1971

1972

/1973

1974

/1975

1976

/1977

1978

/1979

1980

/1981

1982

/1983

1984

/1985

1986

/1987

1988

/1989

1990

/1991

1992

/1993

1994

/1995

1996

/1997

1998

/1999

2000

/2001

2002

/2003

2004

/2005

2006

/2007

2008

/2009

250

260

270

280

290

300

310

320

330

340

350

corn, barley, sorghum, rye, oats, millet, mixed grains, wheat, rice

kg

7/10/09

World Per Capita Consumption

99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/100

20

40

60

80

100

120

140

Soybeans Wheat Corn Rice

+1.3%

+3.3%

-0.1%

+0.6%

Kg

Updated 7/10/09

+16%

-3%

-0%

+29%

Yr to Yr 11-yr

Annual World Per Capita Wheat Production and Consumption

99/00

00/01

01/02

02/03

03/04

04/05

05/06

06/07

07/08

08/09

09/10

e80

85

90

95

100

105

Production

Consumption

Kg/person

July 10, 2009, USDA, PS&D database

World Wheat: Days of Use on Hand

1990

19911992

19931994

19951996

19971998

1999

20002001

20022003

2004

2005/06

2006/07

2007/08

2008/09

2009/10

0

20

40

60

80

100

120

140

Days of Use Average8/12/09

U.S. Wheat Supply and Demand, 8/12/09

0

500

1,000

1,500

2,000

2,500

3,000

BeginningStocks

Production Imports Domestic Use Exports Ending Stocks

million bushels

08/09 09/10 May 09/10 Jun 09/10 Jul 09/10 Aug

+0 +72 -5 = +5 +25 +37

U.S. Wheat Use

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

80/81

81/82

82/83

83/84

84/85

85/86

86/87

87/88

88/89

89/90

90/91

91/92

92/93

93/94

94/95

95/96

96/97

97/98

98/99

99/00

00/01

01/02

02/03

03/04

04/05

05/06

06/07

07/08

08/09

e

09/10

e

Million Bushels

Ending Stocks Feed and Residual Exports Food, Seed, and Industrial

Source: USDA/ERS, WASDE, USDA , 2009/10 estimated

Updated 8/12/2009

U.S. Wheat Stocks

1-Sep 1-Dec 1-Mar 1-Jun0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

5-year avg2007/082008/092009/10e

000 bu

U.S. All Wheat Exports, MY to Date

Week 1

Week 3

Week 5

Week 7

Week 9

Week 1

1

Week 1

3

Week 1

5

Week 1

7

Week 1

9

Week 2

1

Week 2

3

Week 2

5

Week 2

7

Week 2

9

Week 3

1

Week 3

3

Week 3

5

Week 3

7

Week 3

9

Week 4

1

Week 4

3

Week 4

5

Week 4

7

Week 4

9

Week 5

10

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

2006/07 2007/08 2008/09 2009/10

million bushels

Major High Quality Wheat Competitors

Production and Exports

1999/2

000

2000/2

001

2001/2

002

2002/2

003

2003/2

004

2004/2

005

2005/2

006

2006/2

007

2007/2

008

2008/2

009

2009/2

010

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Australia Canada Argentina

1999/2

000

2000/2

001

2001/2

002

2002/2

003

2003/2

004

2004/2

005

2005/2

006

2006/2

007

2007/2

008

2008/2

009

2009/2

010

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Australia Canada Argentina

000 mt 000 mt

Euros per $US

Jan-01 Oct-01 Jul-02 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-090.000.100.200.300.400.500.600.700.800.901.001.101.201.30

€

Wheat Prices

Jan-01Oct-01 Jul-02

Apr-03Jan-04

Oct-04 Jul-05Apr-06

Jan-07Oct-07 Jul-08

Apr-090

2

4

6

8

10

12

$/bu Euro/bu

€1.17/$1

€0.64/$1

€1/$1

€0.71/$1

$ or €

ENSO Alert System Status: El Niño Advisory

Synopsis: El Niño conditions will continue to develop and are expected to last through the Northern Hemisphere Winter 2009-2010.During June 2009, conditions across the equatorial Pacific Ocean transitioned from ENSO-neutral to El Niño conditions. Sea surface temperature (SST) anomalies continued to increase, with the latestweekly departures exceeding +1.0°C along a narrow band in the eastern equatorial Pacific (Fig. 1). All of the weekly SST indices increased steadily during June and now range from +0.6°C to +0.9°C (Fig. 2).

JFM Precipitation Anomalies (mm) and Frequency (%)

Northern High Plains Dryland Wheat Yields

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

0

5

10

15

20

25

30

35

40 Strong Episodes

Average = 21 bu/acEl Nino Average = 23 bu/acStrong El Nino Average = 30 bu/ac

Wheat Variable Costs and Grain Revenue

2003 2004 2005 2006 2007 2008 2009 2010e0

50

100

150

200

250

Total Costs Grain Revenue

$/acre

2010 crop: 20 bushel yield, $5.45 BE (about $6.10 on the board)

Good yields Good price

Grazing Rate to Break Even with Grain Production

$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

$0.60

Wheat per Bushel

$ per pound of gain

Grazing = 5 bushel yield loss and +$4/acre costs

7/10/09

Seasonal Price Index for U.S. WheatJune 1999 – May 2009 Marketing Year

80

90

100

110

120

J J A S O N D J F M A M

Perc

ent o

f Ave

rage

5-year 10-year

July 2010 KC Wheat and Marketing Plan

6/11/2

009

6/22/2

009

7/3/20

09

7/14/2

009

7/25/2

009

8/5/20

09

8/16/2

009

8/27/2

009

9/7/20

09

9/18/2

009

9/29/2

009

10/10

/2009

10/21

/2009

11/1/2

009

11/12

/2009

11/23

/2009

12/4/2

009

12/15

/2009

12/26

/2009

1/6/20

10

1/17/2

010

1/28/2

010

2/8/20

10

2/19/2

010

3/2/20

10

3/13/2

010

3/24/2

010

4/4/20

10

4/15/2

010

4/26/2

010

5/7/20

10

5/18/2

010

5/29/2

010

6/9/20

10

6/20/2

010

7/1/20

10

7/12/2

010

500

550

600

650

700

750

800 ¢/bu

Early season planting conditions Crop Emerging Late Season Southern Hemisphere Crop Production from Dormancy Conditions Harvest 25% 25% 25% 25%

Marketing Philosophies

• Ready, Aim, Aim, Aim, Aim, Aim, ………

• Ready, Fire, Aim!

The man who insists on seeing with perfect clearness before he decides, never decides. Henri-Frédéric Amiel

How high? How long?

Outlook Reports Available

JMWelch@ag.tamu.edu

http://agecoext.tamu.edu/index.html

Mark Welch, Economist—Grain MarketingJMWelch@ag.tamu.edu(979)845-8011