ISSUE 2
MAY 1996

A Wheat Marketing
Strategy to Consider

By Mike Peterson & Sheldon Laib

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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.














 With the shaky stocks situation, uncertainty on the production side, and an optimistic price outlook going into the next growing season, it will be important to protect downside risk. But at the same rate, we know that many farmers need strong cash flow this year to get back on their feet. If you feel that you can't afford to miss out on these prices, this is what we suggest:

Use at the money Kansas City call options. Sell a hedge-to-arrive (HTA) contract at your elevator using Minneapolis December futures; when this was written you would have received $4.74 (Your price will be different from this example, but the strategy will work just the same). Then buy a September Kansas City $5.00 wheat call for 25 cent if you want to retain ownership.

This is a way to guarantee yourself a minimum price, but still benefit from any additional weather problems in the next five months. If we do have another sharp rally, then you can simply take profit on the call option and then deliver against the HTA in the fall after the basis improves.

The minimum price you would be locking in based on a local basis of 20 cents would be:

$4.74 HTA price
-.25 price of the call option
-.20 local basis
$4.29 local cash price

Regardless of where wheat went in the coming eight to 12 months, you would be guaranteed a minimum price of $4.29 assuming minimum quality standards are met. If we rallied to $6.00 by July because of a weather factor-drought conditions, for example-you would then realize:

$4.74 HTA price
+1.00 value of the call option ($6-$5)
- .25 cost of the call option
- .20 local basis 
$5.29 local cash price

Thus, if the price of wheat rallies $1.00, you will still be able to take advantage of it using this strategy. Why not just use a put? The reason is that the December options are so thinly traded and so expensive that we would rather use the futures to protect the downside. Also, any sharp upward movement will most likely take place this summer as a result of weather problems.

For example, you may recall that wheat futures first hit $5.00 last July and have basically traded in a 40-50 cent range ever since. The highs in the market will be made under panic conditions this year, we feel, and weather will most likely be the trigger.

If you are in a strong position and not concerned with price risk, then there is no hurry to sell cash wheat. There should be two opportunities to sell strong prices: once this spring and once again either this summer (drought scenario) or next winter (no drought). But if you are concerned with risk in the wheat market, for 25 cents you can eliminate it by considering this strategy. Not a bad deal in our view!

The authors are marketing consultants with Futech Commodity Services, Moorhead, MN, 1-800-257-9763. Their daily market commentary is included in the electronic Wheat News, a segment on DTN available only to wheat grower association members.

Copyright Prairie
Grains Magazine
May 1996