A 60-cent daily trading price range creates a potential $24 difference in profit per acre depending on what time during the day the wheat is sold. From the time I write this article to the time it is in your mailbox, wheat prices may have increased or decreased $1 to $1.50.
There are reports of speculators losing small fortunes and some index funds have closed commodity trading accounts due to increased risks and losses.
Volatility makes writing these articles tough, but it makes developing and implementing marketing strategies tougher. The good news is that the price volatility is at $7 to $8 cash prices rather than the 5 to 6 cent daily price moves when wheat prices were in the $3 range.
Producers making marketing decisions must remember three things. First, a plan (strategy) will normally generate better results than no plan. Second, producers should stagger sales over time. Third, research shows that profit is mostly made by managing costs, a wise use of technology, and yields. Price is irrelevant if there is not a quality product to sell.
Producers that have wheat in storage are concerned about prices that are about $1 lower than at harvest. These producers are developing or modifying strategies to sell the wheat. The strategies may be based on cash flow needs, simple mechanical steps, or market supply and demand conditions (outlook) that are used to predict prices.
Depending on when cash is needed, strategies based on cash flow needs may work relatively well. This strategy would result in wheat being sold over time, as cash is required to pay for planting the 2009 crop and other bills and scheduled payments. The positive aspects are that prices do not have to be predicted and that wheat sales are staggered over time. The critical aspect is; do cash needs get the wheat sold before Dec. 1?
Producers that have a strategy to sell one-third to one-half of their wheat at harvest, one-half of the remaining in late September/early-October and the remainder in mid-November should continue to follow this mechanical strategy.
Producers that develop a staggered mechanical sales strategy should set a date to have all the wheat sold (kill date). Wheat is then sold in equal lots periodically between now and the “kill” date.
The “outlook” strategy depends on the producer being able to predict prices or knowing someone that can. These people are few and far between. The good news is that research shows that if the wheat is sold by Dec. 1, the outlook strategy will average out over time and will produce nearly the same average price as a mechanical strategy.
Producers that are considering pricing 2009 wheat face even more price volatility with the Kansas City Board of Trade July wheat contract price than with current prices that are based on the KCBT December contract price. Another problem for 2009 forward contracted wheat is that the forward contract basis is about 35 cents lower than last year. The average Oklahoma/Texas Panhandle basis is about a minus $1.10. The basis range is between a minus $0.95 and $1.50.
Producers that want to forward contract or hedge 2009 wheat should consider setting target prices and the number of bushels to be sold at each target.
Volatile prices require sellers to either gamble on “one cut of the cards” or to spread the risk. Overtime, both strategies will produce about the same results. Single sales compared to multiple sales tend to produce more variable income from year to year.
It is important to realize that the higher the prices, the higher the price variability. Higher variability implies higher risk. Higher risk implies the opportunity to increase overall profit.
The caveat is that there will be extremely profitable years and extremely unprofitable years. Plans must be developed and implemented to save during the profitable years to cover the years of losses.