Relatively high wheat prices and volatility may change the way elevators buy wheat. Eight-dollar wheat compared to $4 wheat doubles the amount of credit an elevator must have to buy wheat. Even if a local elevator back-to-back (sell immediately after buying) a producer's wheat, the elevator may not receive payment for 30 days. Higher credit is required for buying wheat, fertilizer and any other product that an elevator sells to producers. Interest and other costs for buying wheat have more than doubled.
Because of increased price volatility, many elevators have decided to buy producer's wheat only when the Kansas City Board of Trade wheat contracts are trading (9:30 a.m. to 1:15 p.m.).
During March 2008, the average absolute (plus or minus) change between the close and the open for the KCBT July wheat contract price was 23 cents. During March 2007, the average change was 2.7 cents. The maximum change in March 2008 was a minus 84.5 cents. During March 2007, the average daily price range was 13 cents. During March 2008, the average daily price range was 33.8 cents.
Relatively large changes between the close and open prices make establishing a wheat price, when the exchanges are not trading, nearly impossible.
Over time, the amount gained or lost by setting a price based on the close, and covering the price based on the opening price of the next day will average out. The problem is that during downtrends, elevators will lose and during uptrends, elevators will gain. When elevators are buying wheat during harvest, the uptrends and downtrends tend to be years apart. It is difficult to wait until next year to offset this year's losses.
Local elevators will grade accurately and account for all dockage. Dockage, non-wheat material that may be easily removed, is not a grade factor. Dockage is removed from weight. If a 60,000 pounds tare weight (1,000 bu.) load is delivered with 1 percent dockage, the producer would receive payment for 59,400 pounds (990 bu.).
All sub-terminal and terminal elevators that buy local elevator wheat remove dockage from weight. If the percent dockage is greater than 1 percent, a dockage discount is deducted from the price. Most local elevators will implement the same discount schedule for farmer owned wheat.
If the 60,000 pound load contained 1.5 percent dockage, the producer would be paid for 985 bushels and the price would be discounted 6 cents. The discount schedule for dockage has not been set for the 2008 wheat crop.
There are price discounts for grade, test weight, moisture, foreign material (non-wheat material that may not be easily removed) and damaged kernels. Producers should ask their elevator for a copy of the discount schedule.
When prices were lower, some local elevator managers believed that it was cheaper to absorb some discounts rather than the cost of determining the grade factor. Higher prices have made grading errors more expensive and local elevators cannot afford to absorb losses.
Another change being discussed by elevator managers is how to handle forward contracted wheat when there is a harvest failure. Elevators that "rolled" forward contracts from 2007 to 2008 have had to make up to $35,000 margin calls per contract. Some elevators had to liquidate assets to generate cash to cover some of the margin calls. Most elevators indicate that they will not "roll" contracts from 2008 to 2009.
Producers should visit with their local elevator manager to learn what changes are being implemented relative to buying wheat. Higher prices come with higher volatility and greater risk. Greater risk normally provides the opportunity for higher profits.
If producers get the 2008 wheat crop in the bin, they will make a relatively good return. It is important that producers manage the profit. We do not know what next year will bring.