September/
October 1998
Store grain, but be quick to sell on rallies
By Tracy Sayler
Library
Back
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.
"You're
much better off storing lower quality barley and lower
protein wheat right now," says Ray Grabanski,
Progressive Ag Marketing, Fargo. But that doesn't mean
you should put all your bushels in your storage basket
and forget about it until your marketing loan matures in
nine months.
Watch daily posted county prices
At these prices, watch the daily posted county price
for program crops. He points out that you can make the
loan work for you if the PCP falls below your county loan
rate, by repaying the loan at the lower PCP rate and
investing the savings (or LDP gains) in a call option
once the grain is sold. A call has the same intention as
a marketing loan: they're tools to keep ownership of the
grain in expectation of a higher market later The added
benefit with a call is that you don't accrue interest on
a loan.
Watch the winter wheat situation
The lower-protein winter wheat crop should help higher quality spring wheat rise in value later in the marketing year, maybe by late fall, says Grabanski. "We won't see $1, but maybe rallies up to 30 or 40 cents," he says. Watch too, the winter wheat acreage situation; dry conditions and low prices will be a disincentive for winter wheat growers to plant, and may become a bullish factor early next year.
George Flaskerud, NDSU extension crops economist, agrees that any price bumps for wheat are most likely late fall and again next January-February if winter wheat acres are confirmed to be down, a substantial amount of wheat has been fed, and some wheat has been sold to China. "Sell on rallies and buy an option- I'm prone to a 30-cent, out-of-the-money September call option at Chicago or Minneapolis- in case of dryness next summer. The best market is debatable, depending on the situation at the time. Chicago adds another uncertainty for a class of wheat farmers here do not produce."
Use incremental sales to take advantage of rallies, however modest. "I would hate to be holding wheat until next summer when loans mature. If we get no rally and we're selling loan wheat next summer, it could be 1998 prices all over again," he says.
It will be more difficult for corn and soybeans to rally than wheat over the winter, says Flaskerud. Corn and bean rallies typically see a price bump when the Mississippi River opens in the spring, in the March-April timeframe. Otherwise, unanticipated export business will be needed to spur corn and bean prices out of what is expected to be a depressed market this fall.
There are several tools to consider in making cash sales; in many cases, the decision should depend not only on market expectations but also on risk attitudes and cash flow considerations, he says.
A minimum price contract (MPC) is a low-risk strategy. The grain is sold and the elevator manager buys a call option. The cost of the option is deducted from your selling price, so the most you can lose is the cost of the option, says Flaskerud. If the futures contract increases, you make money.
An obvious advantage of the MPC over storage is that it costs no more than the cost of storage and probably less. A disadvantage would be that you could not benefit from any basis gain; that is, the potential gain from the cash price advancing faster than the futures price.
A basis contract is another possibility, says Flaskerud. The cash grain is sold and the elevator manager buys a futures contract. Usually, you would collect 75 to 80% of the cash sale proceeds at the time of sale and the balance when the futures contract is closed. The reason for the elevator manager retaining a portion of the proceeds is to cover any losses in the futures contract. You would also be liable for any additional losses.
Flaskerud says this contract is riskier than an MPC because you are exposed to unlimited downside price risk. This contract is simply a substitute for selling cash wheat and buying futures yourself through a broker.
A combination of marketing strategies might be used,
says Flaskerud. Diversification in marketing as in
production is an excellent risk management practice. The
best strategy depends on your attitude toward risk, your
financial situation and your price expectations.
World not awash with wheat
The graph below from Ed Usset, a grain market analyst with Mendota Milling and the University of Minnesota, shows world wheat ending stocks since 1988. The USDA estimates the world will end the current crop year (1998) with ending stocks at about 125 million metric tonnes. Usset points out that this figure is just under the average figure for the previous 10-year period (1988-97 - 127 mmt).
Usset says this outlook for ending stocks is clearly not onerous, yet not the exceedingly tight situations of 1995 and 1996. The problem, he says, is in who holds these stocks. The US share of world wheat ending stocks is forecast at 18% in 1998 - the third straight year of increases and higher than any level experienced between 1988-97. "My conclusion is that US low prices are not the result of excess world wheat stocks, but who is holding them (we are). The (increasing) worldwide coarse grain situation is another important contributing factor," says Usset.
"The world is not awash with wheat. World wheat stocks actually are projected to decline a bit in 1998-99. But what stocks there are in the world, we're holding them," says Usset.
Our wheat stocks, caused by big winter wheat yields and a slowdown in exports because of Asian financial troubles, is a big reason for this summer's price slump. The Asian crisis is hurting US corn exports as well, while the soybean market is suffering more from oversupply. "With corn, the problem is not enough demand; with soybeans, it's too much supply."
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