Posted by: usset001 | August 24, 2010

Selling the carry in the spring wheat market

I received an interesting question about wheat from a producer in west-central Minnesota.

 If you had a bin full of wheat – let’s say 10,000 bushels of unsold winter wheat – what specifically would you do with it?

Before I address your question, I need to explain a quirk in the trading of hard red winter wheat grown in eastern South Dakota, southern North Dakota and Minnesota. Winter wheat grown in this part of the country generally trades off the Minneapolis spring wheat futures market (and not the Kansas City winter wheat market). For this reason, I will address a winter wheat marketing question by referring to the Minneapolis wheat market.

I would sell the carry in the wheat market. Specifically, I would hold the grain in storage, and call your broker to sell 2 contracts of March spring wheat futures. As of last night’s close (August 23), the carry from September to March futures was about 19 cents per bushel (September @ $7.16 and March @ $7.35). I would look to unwind this transaction (i.e. sell stored wheat and buy back futures) sometime later this fall or early next year. You are holding lower protein winter wheat – I don’t have a record of winter wheat basis for your area but I have firm expectations concerning the spring wheat market. I think that the movements in the winter wheat basis should mirror the activity in the spring wheat market in the months ahead.

14% protein spring wheat is currently trading at 90-110 cents under the September contract in the Red River Valley in and around the Fargo area (thank you, Cash Grain Bids). Take into consideration a 19 cent carry from September to March, and we can say that the wheat market is currently trading at 110-130 cents under the Mar’11 spring wheat contract. I expect the spring wheat basis to improve to at least 25 cents under the March by late this year or early next year, with a possibility of “overs” under the right conditions. I would expect a similar move in the winter wheat market.

Sell the carry. Selling the carry allows you to (1) capture a positive carry in futures prices, (2) buy time for a better basis (120 under to 20 under the Mar’11 is the potential for a $1 basis gain), (3) hedge against lower prices, and (4) defer tax revenues to the next year.

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