Posted by: usset001 | August 21, 2009

Spring wheat: post-harvest thoughts

wheaticonSpring wheat harvest in the Red River Valley is just weeks away. Now is the time to answer the most important of questions at harvest; “To store, or not to store?” To answer that question, I like to consider the following questions…

What is the carry in the market?  Back on July 16 I offered a three step appraoch to measuring the carry in the market. I want to apply the same approach here, slightly modified (but the underlying math remains the same). 

Step 1: calculate the carrying charge from September to March (earlier I suggested per month): For spring wheat, I focus on the scarry from September to March. The May and July contracts are heavily influenced by the earlier harvest of winter wheat. The Sep’09/mar’10 carry has been running near 30 cents per bushel positive carry (March at a premium to September).

Step 2: calculate an interest cost for grain storage (earlier I suggested monthly):  With harvest looming, the cash price of wheat is near the $4.80 mark. Let’s assume an interest rate of 5.5% on an operating loan. The cost of financing wheat in storage for 6 months (same time frame as Sep to March) will be…   $4.80 * 5.5% * 6 months / 12 months per year = 13 cents of interest costs over 6 months.

Step 3: compare the size of the carry to your interest costs: 30 cents / 13.2 cents = 227%    In words, the current wheat carry of 30 cents from Sep’09 to Marl’10 is more than two times larger than the interest costs you will incur. For wheat, this is a large carrying charge and I like selling large carrying charges!

Is basis weak or strong?  Wheat basis in the Valley is running from about 35 cents under on the high side to 45 cents under on the weak side. This is not a particularly strong basis for harvest (though we have seen worse in recent years). I like to think that the wheat basis can get back above option price by late this year or in the first 3 months of next year.

Are market prices high or low?  Cash wheat prices a year ago were near the $8 mark. I considered that very high and I was very concerned about lower prices in the months ahead. Today we are under the $5 mark. Not too high or low.

What are my storage costs?  My little exercise to calculate interest costs serves as a nice reminder that, even if you have on-farm storage, there is a cost to storing grain. If you are not a borrower, your view of interest may be different – maybe you want to use the rate on a CD at your local bank as the applicable interest rate. My only request is that you be realistic in your measure of storage costs (nobody stores grain for free!).

What is my appetite for risk?  Holding unpriced grain in the bin can be risky (Are you sure that today’s $4.80 can’t be $4 in 6 months?). Selling grain at harvest and selling the carry has risk (Are you sure that today’s $4.80 can’t be $6 in 4 months). Buying options has risk. You cannot avoid risk, only manage it.

I will write my marketing plan for spring wheat in the next few weeks and post it on my web site. I can tell you that I am leaning heavily towards selling the carry with a hedge on March futures. This allows me four distinct benefits; (1) no more downside price risk, (2) I put 30 cents of carry in my pocket, (3) I get a shot at a nice basis gain in the months ahead, and (4) I can defer income to 2010. By the way, this is all possible because of some very favorable pre-harvest sales, made earlier. I’m not certain how I would approach harvest plans if I had made no early sales.


Responses

  1. I liked your presentation in Philip, SD today. Good job.

  2. Thank you for the compliment. I am still shaking my head in amazement at the largest continuos cornfield I have ever seen, east of Philip on Highway 14. My odometer said it was 2.5 miles long with no roads or paths breaking it up (and it looked very productive for dryland corn in central South Dakota).


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