This week, the KCBT Dec wheat price has been as high as $4.85 and as low as $4.60. As long as the Dec contract price remains above $4.50, cash prices still have a chance to increase.
Whether prices trend up or down will depend on Argentina and Australia’s wheat crops and how the U.S. winter wheat crop progresses. Today’s information indicates that KCBT Dec contract prices should remain between $4.50 and $4.88.
Producers that have wheat for sale should consider selling it a portion at a time. If the wheat is to be sold by Jan 1, consider selling one-third now, one-third in mid November and one-third in mid-December.
If the wheat is to be sold by March 1, consider selling one-fifth of the wheat in each month: October, November, December, January and February. Selling wheat over time produces an average price rather than having to accept the price on a given day.
Producers that are considering pricing 2003 wheat need to consider the government wheat loan rate, the forward contract price, hedge risk and option contract prices.
The average government loan rate for the 2003 crop is $2.80. Thus $2.80 may be used as a minimum price that will be received. If 2003 harvest prices are below $2.80 (which I doubt very much), the loan deficiency payment will make up the difference between the price and $2.80.
The 2003 wheat target price is $3.86 per bushel for 85 percent of base production. The difference between the target price ($3.86) and the loan rate ($2.80) consist of a 52-cent direct payment and a potential counter cyclical payment of 54 cents.
The 54-cent counter cyclical declines penny for penny as the average annual price increases above the loan rate. For example, if the average cash price is $2.80, a 54-cent counter cyclical payment will be paid. If the average cash price is $3, a 34-cent counter cyclical payment will be paid. If the average cash price is $3.32, no counter-cyclical payment will be paid.
When it comes to marketing strategies, producers should ignore the direct and counter-cyclical payments. What matters is the $2.80 loan and the LDP.
Last harvest the basis was a minus 17 cents in central Oklahoma. A minus 17-cent basis meant that the cash price was 17 cents less than the KCBT July wheat contract price. The five-year average basis is a minus 30 cents.
At this writing, the KCBT July 2003 wheat contract is $3.78. If the June 2003 basis is a minus 25 cents (selected between –17 and –30), wheat could be hedged for $3.53 per bushel. The risk is that wheat prices could increase between now and harvest resulting in margin calls.
The key to forward contracts is the basis. Check the difference between the forward contract price offered and the KCBT July wheat contract prices. An attractive basis would be minus 30 cents or better in central Oklahoma or minus 35 cents or better in the Texas panhandle. With a $3.78 KCBT July contract price and a minus 25-cent basis, the forward contract price is $3.48.
After the wheat is forward contracted, an “at the money” July 2003 call option contract could be bought. A KCBT $3.80 call option contract could be purchased for (reference $3.78 KCBT July contract price) about 33 cents per bushel or $1,650 per 5,000-bushel contract. This would produce a minimum price of about $3.15 ($3.48 forward contact price - $0.33 premium).
Buying a put option produces about the same expected minimum price as forward contracting and buying a call option. The difference is that the forward contract and call option produces a guaranteed price where the put does not.
Developing marketing strategies is an essential part of marketing. The strategy should be developed to meet cash flow requirements and be one that allows the producer to sleep even when wheat price movements go against them.
Kim Anderson is an Extension agricultural economist with Oklahoma State University.