April/May 1997
Consider Budgeting $5-$15
Per Acre for Price Protection
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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.
No need to go into much detail about last year's "rags-to-riches-then-back-to-rags" story in the wheat market. You're well aware that wheat prices rose to all-time highs in 1996, as world supplies were at the lowest level in over 20 years. Globally, producers planted more acres, harvested more bushels, and wheat has declined sharply in value since last May.
Internationally, the wheat trade remains robust as the world's population continues to grow along with its ability to afford better nutrition. The world price of wheat has recently firmed to $155/metric ton from a low of $125/mt in January. However, the U.S. unfortunately has not garnered as much of the export market in the 1996-97 marketing year as it would like. Due to the short winter wheat crop, domestic stocks are tight, and slow farmer selling has kept U.S. prices above those of other exporting countries. Australia and Argentina had record wheat crops last year and used "fire sale prices" to market their larger supplies.
Enter the new growing season, and at the end of May, a new marketing year. Winter wheat acreage decreased sharply from last year and is the lowest number of planted acres since 1978. Many market analysts, myself included, expect to see substantially less spring wheat acres than in 1996. Oilseeds, feed grains, and other specialty crops will be planted as these crops are more profitable at current prices. In western MN and eastern ND, there are agronomic reasons not to plant wheat because of persisting disease and insect problems. Weather will also be a factor in deciding how much spring wheat gets planted and how much winter wheat is abandoned. Current crop conditions in the hard red winter wheat areas are nearly perfect which will keep weather and reduced acreage rallies in check.
It is unlikely wheat will rally this year to levels seen in the spring of 1996. Producers should target the $3.80 to $4.20 areas in the Minneapolis September or December futures by buying put options or initiating some type of hedge strategy. A midsummer low will hopefully be met by an improved export picture, perhaps with some help from the Export Enhancement Program.
While the price for high grade milling durum wheat remains well above HRS wheat, lower grade or damaged durum remains weak. Look for a sideways durum market into spring and unless a weather problem develops, expect lower prices in 1997.
Barley is in a similar situation since stocks of feed grains are significantly higher than a year ago. Without help from a production problem in a major growing area, the upside in barley is limited. Use spring rallies to complete '96 sales and look at buying December corn at $2.80 to $3.20 put options to hedge part of the 1997 production.
Have a marketing plan
The Freedom to Farm Act will provide more market volatility, and producers should have a plan to implement a marketing strategy when opportunities arise. If you are unsure of how to use marketing tools or need help in establishing a marketing plan, see a market consultant. Plan on spending $5 to $15 dollars per acre on price insurance.
To estimate the cost of price insurance is quite simple. With the at-the-money ($3.80) September Minneapolis wheat put option costing 20 to 25 cents per bushel (at the time this was written) and using an expected yield of 40 bushels per acre, this would cost approximately $8 to $10 per acre (40 x .20=$8)
When futures prices are higher and more volatile, option premiums are higher priced. Last year when the market was $6 to $6.50 per bushel, a $5.20 September put option was trading around 30 cents per bushel. This would have returned approximately a $5 minimum price last year.
Producers should look at what their cost of production is for producing an average crop of wheat when creating a marketing plan. Start "scale-up selling" (sell a percentage of crop at subsequent higher prices) when the market reaches your cost of production, or at least establish a minimum price by buying put options. The idea is to sell at a profitable level or to catch the upper one-third of the seasonal price range. Use a variety of marketing tools, such as futures, options, or cash forward contracts, basis-fixed, futures-fixed, and minimum price contracts with elevators.
Disclaimer Note: The information and recommendations are believed to be reliable, but changing market variables can alter price outlooks. Northern Crops Marketing & Investments, Ltd. and Brad Paulson are not liable for their use. Futures and options trading involves risk, and past performance is not indicative of future results.