Posted by: usset001 | July 13, 2010

Large carrying charges create opportunities for pricing 2011 hard red spring wheat

I am not certain that I understand the drivers behind the current rally in wheat prices. I am not certain that I understand the issues surrounding the lack of convergence in the Chicago and Kansas City wheat markets, or the push towards full carrying charges in all wheat markets. Here is one thing I understand: I can start pricing 2011 spring wheat for $6 per bushel, and my production costs are closer to $5 per bushel.

I love big carrying charges – every seller should love big carrying charges. Today the Sep’10 contract closed at $5.78 per bushel. The Sep’11 contract closed 60 cents higher at $6.38 per bushel, with another 16 cent carry to the Dec’11 contract. I priced 33% of my expected 2011 production by selling 2 contracts of December wheat futures. My newly created 2011 pre-harvest marketing plan for spring wheat will be posted soon here.

Concerning production costs, I used the Red River Valley, 2009 report written by the good folks at Minnesota and North Dakota Farm Business Management Education. They use real numbers from real farms. Spring wheat production costs for farms in the middle quintile (40-60%) were estimated at $4.99 per bushel on cash rented ground and 70 cents less for wheat grown on owned land. These figures include all direct and overhead expenses, less direct government payments, plus a modest return for labor and management.

How often do you get the chance to price grain at $1 per bushel above costs?

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