My Post Harvest Marketing Plan for Wheat

By Ed Usset
usset001@umn.edu

Let me take you through the steps I use to develop a post-harvest marketing plan, using my 2004 spring wheat crop as an example.

The basic challenge in post-harvest marketing is to size up the market opportunities for storage.  How do I go about “sizing up the market” for post-harvest storage opportunities? 

I look for the answers to the following questions:

• What is the carry in the market?
• Is basis high or low?
• What are my storage costs?
• Are market prices high or low?
• What is my appetite for risk?

As of mid-July, my local elevator is bidding $3.63 for new crop wheat. Nearby September futures are trading at $3.87, December at $3.95, March at $4.01, and May at $4.02.  This year I don’t need to worry about LDPs on my 25,000 bushels harvested.  Let’s see how I use this information – combined with my desire to avoid making any marketing “mistakes” – to fashion a marketing plan. 

What is the carry in the market? The market at this writing is offering an 8-cent carry from September to December, and 14 cents to March. This is an average carry in the spring wheat market, and large enough to compel me to sell the carry on at least a portion of my crop. 

How about the basis? At 24 under the September ($3.63 cash - $3.87 futures) the basis is also remarkably average. But here I’m willing to think that we could see a basis as high as 5 under the December contract before the end of the year.

Concerning storage costs, I see a good opportunity to make money on a storage hedge using my on-farm storage.  It is difficult to sell the carry with success if I am paying a full commercial rate of 3-3½ cent each month.

Holding unpriced grain in the bin after harvest is a viable but risky strategy.  These last two questions acknowledge that risk.  With March wheat trading at the $4 level, I do not consider futures prices to be particularly high or low.  This question is important because the risk of futures prices trending lower after harvest is elevated in years when futures prices start at a high level.  I can see the opportunity for a healthy post harvest rally in cash prices, so I’m willing to hold some unpriced bushels in the bin.

Usset is grain marketing specialist for the University of Minnesota’s Center for Farm Financial Management (http://www.cffm.umn.edu) developer of FINPACK and MARKETEER software. Working with his colleagues at CFFM and in Extension, Usset has helped develop the award-winning “Winning the Game” series of workshops.  The third and latest of this series, “The Post Harvest Marketing Challenge,” will be available for local sponsorship and scheduling this fall. To learn how you can become a sponsor, call CFFM at 800-234-1111.

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2004 Post Harvest Spring Wheat Marketing Plan for 25,000 bushels

Seek strategies that offer a price higher than the loan rate. Hold no unpriced wheat beyond July 1, 2005.
Price and deliver 5,000 bushels at harvest. (Call me dull, but it’s perfectly OK to sell some grain at harvest.  Cash in hand, no storage costs and no more risk of lower prices.)

Use futures-fixed contracts to sell the carry with 10,000 bushels. Price 5,000 bushels with the December contract at $3.95.  Price another 5,000 bushels with the March contract at $4.01.  If I reach my basis goals of 5 under the December and option price on the March, I will get final prices of $3.90 ($3.95 - $.05) and $4.01 ($4.01-$.00) respectively.

Exit strategy for futures-fixed contracts: I will unwind my December storage hedge when the cash basis reaches 5 under the December futures contract or by the first week of November.  I will unwind my March storage hedge when the cash basis reaches option price in the March futures contract or by the first week of February.

Hold the remaining 10,000 bushels unpriced for sale in the first half of 2005.

Exit plan for unpriced grain held in storage:  Sell 3,000 bushels at $4.00, 3,000 bushels at $4.15, and the last 4,000 bushels at $4.30.  For protection against lower prices, I will use a 20-cent trailing stop on all unpriced bushels (I will bail out if the cash price ever declines more than 20 cents from its most recent high). Bushels unsold by the end of April will be sold in equal increments in May and June.

There you have it – my first draft of a post harvest plan for my wheat crop. It’s not etched in stone – I won’t make a final decision until harvest is here because market prices and the carry can change (and fast!).  But I have clearly made the goal of eliminating marketing mistakes the foundation of my post-harvest plan.

For example, I am using futures-fixed contracts to sell the carry, because I think that market carrying charges and basis are offering a decent potential return.  My exit strategies are specific; containing both price and time elements.  Finally, my objective openly states the 11th Commandment – the ultimate exit strategy – of grain marketing: “Hold no unpriced wheat beyond July 1, 2005.” Good luck fashioning your own marketing plan.

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More Marketing Plan Examples

Go to the web site, www.cffm.umn.edu/Marketing /.  Click on the “Marketing Plans” tab for more wheat, soybean, and corn marketing plans by Ed Usset. Pre-harvest and post-harvest examples are given, as well as examples of using baseline prices to measure your plan versus the market.