- No perfect strategy exists for selling wheat.
- If someone could predict prices, they would sell all their wheat on a single day.
- A risk adverse producer could have used the one-third strategy and received about $7.56 per bushel.
The perfect wheat marketing plan for 2012 harvested wheat would have been to sell all the wheat on Friday, July 20, 2012. The Central Oklahoma and Texas Panhandle price was about $9.05. Subtracting 5 cents storage and interest (carry) costs, the net price would have been $9. Nine dollars will be used as the price generated from the perfect 2012 wheat marketing plan.
In the following analysis, the assumption was that wheat was stored in a commercial elevator for 4 cents per bushel per month ($0.00133 per day). Storage and interest costs to own wheat until October 15 was 17 cents, 21 cents until November 15, and 25 cents until Dec 10.
Prices, after subtracting carry, were $6.53 on June 20, $8.01 on October 15, $8.14 on November 15, and $7.95 on December 10. Given the volatility of prices, no statistical difference occurred in the October, November, and December prices. This event means that if different days were selected to sell the wheat, the prices relationships would change, and any of the months could have had the highest price.
If the one-third strategy (sell one-third on June 20, one-third on October 15, and the final third on November 15) was used, the net price would have been $7.56.
On April 1, wheat could have been forward contracted for $6.42, and the June 20 price was $6.53. Forward contracting one-half of expected production on April 1 and selling the remainder of the wheat on June 20 would have netted $6.47 per bushel.
Just using cash marketing strategies, the perfect plan would have been to sell all wheat on July 20 ($9). The next best scenario would have been to sell all the wheat anytime from October 1 through December 10. Selling wheat in one-third lots would have been the next best strategy ($7.56), followed by either selling wheat at harvest ($6.53) or forward contracting and selling at harvest ($6.47).
Some producers like to hedge by selling wheat on the Kansas City Board of Trade, buying put option contracts in April, or selling wheat at harvest and buying call option contracts.
Buying put option contacts in April to cover one-half expected production and selling all wheat at harvest produced a net price of $6.53, which is the same price as selling all the wheat at harvest.
Selling all the wheat at harvest and buying December call option contracts produces a net price of $7.66, which is about the same net price as the one-third strategy ($7.66).
What this analysis shows is that if someone could predict prices, they would sell all their wheat on a single day ($9). No one can predict prices. Now the question is, “Should all of the wheat have been stored to sell in the October through early-December time period?”
On June 20, the price was $6.53. The five-year average price was $6.45. Both U.S. and world wheat stocks were near the five-year averages. The U.S. winter wheat crop was predicted to be about 7 percent of the world’s wheat production. On June 21, 2010 (24 months prior), wheat prices were $3.70.
Given this information, a prudent producer would think the odds of higher prices were about 50/50. Remember, it was a drought in the Corn Belt that resulted in higher wheat prices.
So what was the best strategy? Sell all wheat on July 20 for $9 per bushel. A risk adverse producer could have used the one-third strategy and received about $7.56 per bushel. A producer who didn’t need cash to pay bills and could take some risk could have stored all his wheat into the fall and received about $8 per bushel.
What was the perfect strategy? There isn’t one.