June 1998
Taming the Bulls & Bears
Opinions from four marketing experts
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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.
They say that corn is king, meaning it's the key market mover, and dismal export performance in corn (and to a lesser extent wheat) has pulled corn and wheat prices down. Corn export prospects for 1997/98 stand at 1.475 billion bushels. As recently as last October, USDA was projecting crop year corn exports at 2.025 billion bushels, 550 million bushels and over 30% higher than the projection now! Need we be reminded of the Asian financial crisis that struck last fall?
The prospects of a 9.6 billion bushel corn crop and continued subdued exports have corn and wheat prospects for 1998/99 on the defensive. But the 1998/99 supply and demand prospects for total US wheat are not that bad. Unlike corn and soybeans, wheat ending stocks are not forecast to build in the coming year, thanks to a dramatic decrease in spring wheat acres. I expect to see a tightening in spring wheat stocks in the year ahead, both in the US and in Canada.
In the current situation, no marketing strategies exist that can guarantee higher prices or a profit. However, there are several tactics that can be used to increase cash flow and buy time in hopes of higher prices later on.
If you are still holding old crop wheat, one tactic is to sell your wheat and buy out of the money calls. I prefer out of the money calls because they cost less but still provide you the opportunity to benefit from a sharply rising market (but they won't do much good if a market rally is small). This maneuver turns your crop into cash but keeps you in the market for a price rise. This same tactic could be used for wheat harvested later this summer.
Another tactic: put your wheat under loan and receive $2.70. Again, the purpose here is to generate cash and buy time for the ever-hoped-for price rally.
As long as we are buying time for a rally, let's consider the prospects for a drought- driven rally this summer. Dry conditions exist in western ND and the northern half of MT, spring wheat and durum country. While the weather has been warmer than average in the Corn Belt, the Palmer Index of Drought Severity (long term) shows that moisture is normal to abundant. Thus, there is only a modest potential for weather rallies at this point, although it's early in the growing season and much can happen yet.
David Bullock
For postharvest marketing of new crop wheat, I would look at the carry structure in the futures market to give an indication of returns to storage. Currently, the HRS market is offering a storage premium of approximately one cent per bushel per month up through March '99. Durum is offering pretty much the same. This is generally inadequate in covering the average producer's variable storage costs. If prices remain low at harvest, I would look at the following strategies: 1) store and buy puts (if there is significant carry in the market); 2) sell cash and buy calls (if there is an inverse at harvest).
For old crop wheat, I would recommend selling in the cash market now and maybe buying out-of-the-money July '98 calls if I thought there was a significant chance that the price would go up between now and harvest. I would definitely liquidate the calls if the market spikes due to weather scares this summer or if the predicted post-El Nino drought materializes.
The options spreadsheet collection that I authored a few years ago and is currently offered by the MGE can be a significant help to producers in evaluating marketing alternatives. They are free and can be ordered from the MGE marketing department by calling 1-800-827-4746.
George Flaskerud
There are some potentially bullish factors to consider in the wheat market. A world wheat stocks-to-use ratio of about 22% is currently projected for 1998/99, which is not burdensome. Also, it is dry in Mexico, south Texas, key wheat-growing areas of Canada and western ND-eastern MT. The market will be sensitive to conditions that would favor scab in soft red winter wheat late spring/early summer and in HRS in July. These factors could change but if they occur, result in production that is less than anticipated, thus supportive to prices.
Consider too that spring wheat acreage won't be finalized until USDA's plantings report at the end of June. It is possible that low wheat prices and strong sunflower and canola prices could steal a few more wheat acres away from the initial estimates of the March 31 prospective plantings report.
The negatives are that we still have a U.S. stocks-to-use ratio over 30%. So we have a healthy stocks situation and new-crop production that is anticipated to meet demand, despite the lower wheat acreage. The export outlook will be tempered by continuing financial problems in Asia, political unrest in Indonesia, nuclear testing in India and the European Union's willingness to use export restitutions.
These negatives are factored into USDA's estimated average US farm price of $3.25 for wheat in 1998/99. This would imply a lower harvest price, perhaps 5% less. But the premium that HRS has over other wheat classes should offset a harvest discount, so I would guess the HRS cash price at harvest will be around $3.25. This is based on an expectation of average conditions; a good crop with good quality could spell lower prices, but I don't think the price can be pushed much further than $3.00. In August of 1992, the average wheat price was $3.09 in ND.
Given this scenario, watch for any price bumps due to weather and if they occur, take advantage of them. If Minneapolis September futures climb to $3.90-$3.95, to me that's an obvious point to make sales, maybe scaling up sales between $3.80 and $3.95 using a combination of puts and forward contracts. I would forward contract only if Minneapolis Sept. wheat gets up to $3.90.
If we just trade sideways and it doesn't look like Minneapolis Sept. futures will get to $3.90, then I would just buy put options. A put bought in June on $3.80 Minneapolis Sept. wheat would probably cost about 15 cents a bushel.
At harvest, should you sell or store? Examine the futures price and your local basis pattern to help answer that question. Store if it looks profitable and if the Dec. futures prices looks decent. If Minneapolis Sept. wheat drops to $3.25, meaning a cash price of $2.90 to $3.00, then there's no point in buying puts or selling. Then, just store and take out a loan. If storage doesn't look profitable, and there are little or no carries in the futures market, consider selling off the combine and buy out-of-the-money calls (spend no more than 12 cents) on unforeseen 1999 HRW acreage.
Farmers are going to have to evaluate conditions as they develop and adjust strategies with the fast-moving markets.
William Tierney
Right now, one of the big features of the soft red winter and hard red winter futures market is that the "carries" all the way out to March 1999 are the largest since the early 1980s. Unfortunately, a similar situation does not yet exist for MGE contracts.
Also, the spread between MGE and KCBT December contracts is the largest since the mid 1980s. I wonder if the good yield prospects for HRW (implying lower average protein content) and the reduction in U.S. and Canadian spring wheat acres has got the trade nervous about the availability of high protein bread wheats.
The "carry" is generally understood to be the "spread" between two future contracts within the same marketing year. For example, for winter wheat the first "new crop" contract is the July 1998. As you advance into the marketing year, you come to the Sep, Dec, Mar, and May contracts. The "carry" is the spread (difference in price) between the contract price of, say, the March 1999 versus the July 1998 (say it's $.30/bushel)
When this "spread" is divided by the cost of storing the grain (interest + storage charges) you get an estimate of the "carry" (i.e. 50% of "carrying charges," or 90% of "carrying charges").
Assuming that there are no major weather scares between now and late June, I expect the KCBT July wheat futures contract to trade down to the $3.00 level. After that, it depends on how big the winter wheat crop really is, how the spring wheat crop is doing (will it get the moisture it needs?), and what the lineup looks like for wheat exports. On average, export commitments of wheat grain account for 28% of annual wheat grain inspections by the beginning of July. If we don't have a respectable amount of business on the books then, we should probably cut back estimates of U.S. wheat exports.
One thing I'm uncertain about is the possible "testing" of the marketing loan for wheat. New crop bids for HRW are still above loan rates but if the market drops another $.20 that could put prices at or below loan levels. I understand that in Illinois for current spot SRW, prices have already gone below loan.
If, at harvest, the Posted County Price (PCP) goes below loan, say $2.60 and the loan rate is $2.70, a farmer could apply for and receive a Loan Deficiency Payment (LDP) of $.10 and not take out the loan. The farmer would have an incentive to do this if the local cash price was above the PCP, say at $2.67.
So here are the farmer's choices: (1) take out the loan and receive $2.70 and incur interest and storage charges for the next nine months hoping prices go higher; (2) take the LDP of $.10 and store the crop; or (3) take the LDP of $.10, sell the wheat for $2.67 and net $2.77 ($2.67 cash + $.10 LDP), thereby avoiding any further interest and storage costs. If situation (3) is common, that will push more grain on the market at harvest and could have a further depressing effect on prices.
I think that with prices at (or even below) loan at harvest, this represents a "fundamental" value. If I were a wheat producer, I would want to retain ownership of my crop. If I've sold the crop, purchasing calls (perhaps March 1999) would be one way to do this with limited risk.
If protein premiums look strong (and if it looks like they'll get stronger) producers who have high protein wheat will probably have to store it on farm and try to market it after harvest.
("Taming the Bulls and Bears" is a market education feature of Prairie Grains. If you have a question or topic you'd like to see addressed in this feature, send it to: Minnesota Wheat, attn: Prairie Grains editor, 2600 wheat drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Email: mnwheat@means.net.)n