Raising the 2008 wheat crop is nearly done. What remains is to get the 2008 wheat harvested and sold. Now is a good time to develop a marketing plan and for producers to develop a plan and strategy for the 2009 wheat crop.
At this writing, the Kansas City Board of Trade July 2008 wheat contract price is $9.30. The forward contract harvest basis offer is between a minus 60 cents in northern Oklahoma to a minus 95 cents in southern Oklahoma. Harvest basis in the Texas panhandle is between a minus 72 and minus 85 cents.
Wheat may be forward contracted for harvest delivery based on the KCBT July wheat contract price plus the basis. In central Oklahoma, this would be $8.60 ($9.30 - $0.70 basis = $8.60).
With the current situation of price uncertainty, neither grain elevators nor producers know what to expect from the wheat market. Producers essentially have three choices. The first choice is to use their own analysis or advice from others to outguess the market by buying and selling futures contracts and options to lock in or establish minimum prices. Then, based on price outlook, sell on the cash market. Research has shown that over the long run, rarely is the average price received enhanced by using futures and option contracts or by using price outlook.
Forward contracts, futures contracts and futures option contracts are great risk management tools. They are not price enhancement tools. Profit is normally increased by managing production costs and yields and by managing finances.
A second marketing option is to use mechanical strategies. One strategy would be to forward contract or hedge one-fourth of expected production now, sell one-fourth at harvest, one-fourth in late-September or early October and the final fourth in November. This staggered strategy produces near an average price for the season. Another mechanical strategy is to sell one-third at harvest, one-third in September/October and the final third in November.
I prefer a staggered strategy because, “I'm always right.” If prices peak at harvest, I sold some wheat at the high price and if prices peak in the fall or winter, I still have some wheat to sell.” The strategy lets me sleep at night.
A third strategy is to sell all the wheat at harvest and concentrate on managing finances, buying inputs for the 2009 crop and getting it planted. Research has shown that over time, selling at harvest has resulted in a slightly above average price.
There are other selling (marketing) strategies. The key is to establish a plan and follow it. Predicting price movements is like trying to predict when and how much rain a field will receive.
Some producers sell enough wheat at harvest to pay harvesting costs and to cover the costs to plant the 2009 wheat crop. Given fertilizer, fuel, seed and other inputs price increases, production costs have changed dramatically since planting the 2008 wheat crop.
Using $700 per ton for anhydrous ammonia, $1,000 per ton for diammonium phosphate and $375 per ton for UAN (28%), $3.85 for diesel and $12 per bushel for seed, variable costs of production are $165 per acre. Custom harvest rates of $18, $0.18 and $0.18 were used. The costs do not include land or other fixed costs.
Using 35 bushel per acre production, the breakeven sale price would be $4.71.
Total costs per acre, not including land, were $183 per acre. The breakeven price would be $5.23.
The market is going through changes, which complement both marketing and production decisions. Management practices will have to be adjusted. One problem is that some adjustments cannot be anticipated and decisions will have to be made “on the spur of the moment.” Having production and marketing plans will increase the odds of making the right decision “on the spur of the moment.”