Wheat Strategies

         Wheat acreage is down in Central Missouri, but some of you have wheat—what should you do with it at harvest?

             Sell it?  Production will be down from last year.  Both U.S. and World supplies are tightening up and uncertain weather could producer higher prices in all grains.  These and other factors have caused market analysts to be reluctant to recommend pre-harvest or harvest time sales.  However, if you choose to sell at harvest, based on current prices it appears that cash prices will be below county CCC loan prices.  County loan prices vary, but a cash sale plus collecting the LDP would net somewhere near $2.50.

             Should you store the wheat for a few months?  Short-term storage of wheat often doesn’t work well in Central Missouri.  Unlike corn and soybean, the weakest wheat basis (difference between cash and futures prices) usually doesn’t occur at harvest time.  Central Missouri wheat basis typically weakens (widens) through the fall months (corn and soybean harvest).  Unless prices rally sharply, this weaker basis often cancels out early post-harvest futures price gains.  This means, that to earn storage returns, wheat often needs to be stored until about December (maybe longer) before basis and/or price recovers enough to cover storage costs.

             What about storing and putting wheat under loan?  Assuming you only want to store for 3 or 4 months, commercial storage and interest costs amount to about $0.14.  This would provide a price floor of about $2.36 (assuming $2.50 loan price minus $0.14 storage cost). Storing longer would add to costs and reduce the floor price.  As long as cash prices stay below the loan price, the PCP (posted county price) will reflect the weaker basis and the MLG (market loan gain) would offset weaker basis.  If prices rally above loan rate (there would be no MLG), the move needs to be enough to offset weaker basis, storage costs and possibly loan interest before storage gains could occur.

             Suppose you sell the wheat, collect the LDP and buy a call option?  Due to the typical wheat basis pattern for Central MO, selling at harvest and buying a call option usually works better for wheat than it does for corn or soybeans.  Using Wednesday’s (6-13-01) wheat market as an example, selling cash wheat and collecting the LDP provides a return of $2.50 ($2.25 cash bid plus $0.25 LDP—assuming $2.50 loan price).  Wednesday’s premium for a $2.90 (strike price) December Chicago wheat call option was about $0.17.  This produces a net floor price of about $2.33 ($2.25 cash price plus $0.25 LDP minus $0.17 call premium).  This compares favorably with storing under loan and there are no storage costs.  In this example, if December futures price rises above $3.07 ($2.90 strike price plus $0.17 call premium), you participate in the price increases without storage or basis risk.

             While there are other possible strategies, these illustrate some of the choices.  Your final choice depends on cash flow needs, how comfortable you are with the risks and whether you want to speculate on the potential for higher wheat prices. -Melvin

Decisive Marketing - June 15, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010615.html -- Revised: April 20, 2004
breesm@missouri.edu