Posted by: usset001 | November 23, 2009

Rolling my spring wheat hedge to the Jul’10 contract

I posted my post-harvest marketing plan for spring wheat in late August. I followed Earl Eitheror and “sold the carry” in the spring wheat market, by placing grain into on-farm storage and using the futures market to sell Mar’10 futures. By selling the carry, I can earn a return to storage (the Sep’09/Mar’10 spread was 37 cents at harvest), defer taxes to next year and wait for a stronger basis in fall or winter.

Why did I sell Mar’10 futures and not May’10 or Jul’10? This is a judgment call. Technically, the July contract in spring wheat represents the last contract in the same crop year for spring wheat. However, earlier harvests in the winter wheat markets can have a large impact in the price structure of the May and July contracts. I simply find it “cleaner” to deal with the March contract in spring wheat – I find in many years that what should be conditions for a large carry to May or July spring wheat futures gets overwhelmed by the new crop economics of winter wheat markets.

That said, I see a great opportunity to roll my hedge from the Mar’10 to Jul’10 contracts in spring wheat. The Mar’10/Jul’10 spread showed a 20 cent carry in late August – today it is trading at 25 cents or better. The interest costs for holding wheat in the bin for an extra 4 months might cost me 8 cents per bushel. A 25 cent carry will cover that 3 times over.

By rolling the hedge forward (buy back my Mar’10 contracts and sell Jul’10 contracts), I get an extra 25 cent carry and the chance to wait a few more months for (hopefully) an even stronger basis.

By the way, here’s how I assessed the carry from the March to July contracts:

Step 1: calculate the carrying charge    $6.06¾ (Jul’10) – $5.81¼ (Mar’10) = 25½ cents per bushel

Step 2: calculate a per bushel interest cost for grain storage     $5.60 (cash grain price) * 4.25% (prime plus 1% interest rate) * 4 months (Mar- July) / 12 months per year = 8 cents

Step 3: compare the size of the carry (Step 1) to interest costs (Step 2)  25½ cents carry / 8 cents interest cost = 320%


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