The wheat basis for most of Oklahoma is a minus 7 cents basis the KCBT September wheat contract price. The Texas Panhandle wheat basis is mostly a minus 25 cents. These are about 35 cents above the five-year average. A 35-cent above average basis results in the cash price being 35 cents higher than with an average basis.
Cash wheat prices are determined by adjusting the KCBT September wheat contract by the local basis. At this writing, the KCBT September wheat contract price is $7.07. Using the minus 7-cent Oklahoma basis, the cash price is $7 ($7.07 – 7 cents). If the basis were at the five-year average (-42 cents), the cash price would be $6.65, 35 cents less than it is now.
Some analysts believe that the basis is above average because of feed demand for wheat, relatively high protein levels in the wheat, and the protein premium. If the above average basis is the result of strong feed wheat demand and 2013 U.S. corn production is USDA’s projected 13.95 billion bushels, feed wheat demand should decline within the next two months.
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Lower feed wheat demand may result in lower basis. Lower basis would result in lower cash wheat prices without any change in KCBT wheat futures contract prices.
The risk in storing wheat is storage and interest costs and lower prices. Commercial storage and interest costs are about 6 cents per bushel per month. To store until December 1, cash wheat prices must increase 16 cents to cover the additional costs.
Lower cash prices may be the result of lower KCBT wheat futures contract prices and/or a lower basis. The odds of lower KCBT wheat futures contract prices are about 50/50. The odds that the basis will decline are significantly higher.
If you agree with this analysis, what are the marketing alternatives for stored wheat? Wheat may be sold saving the 16 cents storage and interest costs and locking in the current basis and futures contract price. All risks of lower prices are alleviated.
Another alternative is to sell the wheat and re-own the wheat by buying KCBT December wheat contracts. This would save the 16 cents in storage and interest costs and would lock in the above average basis. If the futures contract price declines, the loss would be no different than if the wheat were in storage (margin calls would have to be met). If the futures contract price increases, the gain would be obtained by selling the futures contract.
Another strategy is to sell the wheat and buy December call option contracts. At the money December call option contracts cost about 40 cents per bushel or $2,000 per 5,000-bushel contract. Of the 40 cents 16 cents would be paid for with the storage and interest savings. The December contract price would have to increase 26 cents before any benefit (price increase) would be realized.
Both of these strategies protect the price from a declining basis. Both strategies offer the opportunity of higher prices (the call less than the futures contract). Both strategies have the potential to net a lower price than if the wheat is just sold now and no futures or futures option position is taken.
The current basis is historically high. The odds are that the basis will decline. A lower basis will have a negative impact on cash prices. Protection against a lower basis can be obtained by selling the wheat now.
Sound management practices often include spreading risk over time. This is accomplished by using one of the above strategies or by selling wheat in increments over time.