At this writing, the cash wheat price in Perryton, Texas, is $8.25 and the price in Medford, Oklahoma, is $8.28. Wheat may be forward contracted for harvest delivery for $8.40 (-55 cents KCBT July 20113 contract) at the Perryton and Medford elevators. Some producers are worried about protecting these relatively high prices.
Since June 1, 2007, in Medford, Oklahoma, cash wheat prices have been above $8.40 only 15 percent of the time. Prices have been above $9 only 5 percent of the time, above $10 only 2.2 percent, above $11 only 1 percent and above $12 only three out of 1,373 days. If you’re going to lock in a price, $8.45 is a relatively high price.
One problem with forward contracting or hedging 2013 harvested wheat is that production is uncertain. Most of the hard red winter wheat is being established in severe to extreme drought conditions.
The November 14 USDA wheat crop progress report rated U.S. winter wheat 19 percent Poor to Very Poor and 36 percent Good to Excellent. Oklahoma’s wheat was rated 38 percent Poor to Very Poor and 13 percent Good to Excellent. Texas’ wheat was rated 28 percent Poor to Very Poor and 30 percent Good to Excellent. These ratings indicate that, historically, the 2013 wheat crop is off to a weak start.
Poor crop conditions, especially dry conditions, increase the risk of forward pricing wheat. The Texas and Oklahoma wheat crops may die due to lack of moisture, blowing, and freeze damage.
The expected June 2013 wheat price is $7.75. Depending on 2013 U.S. winter wheat production, Oklahoma and Texas June, 2013, wheat prices may be as low as $6.50 or as high as $9.50.
Between now and next June, wheat will be harvested in India, China, Pakistan, and Northern Africa. For June, 2013, Oklahoma and Texas cash wheat prices to decline $1.90 ($8.40) to $6.50, well above average wheat production is required in nearly all these countries, plus in Oklahoma and Texas.
If June, 2013, wheat prices are around $6.50, Oklahoma and Texas wheat producers will have significantly more wheat to sell compared to if the wheat price is $8.45 or higher. Higher production will mostly offset lower prices.
If June, 2013, wheat prices are in the $9.50 range, Oklahoma and Texas wheat production will probably be well below average and producers will have significantly less wheat to sell at a higher price. Lower wheat production will be partially offset by higher prices.
If production is high and prices relatively low, producers will wish they had priced wheat. If production is low and prices are relatively high, producers who priced wheat at current prices will wish they hadn’t priced wheat.
It’s a “Catch 22.” An indicator of how to make this decision is to ask, “What will let me sleep at night?” If you are losing sleep because you have not protected price, forward contract or hedge some wheat. Just remember that if you don’t get any moisture on your wheat, you may lose sleep worrying about producing enough wheat to meet the contract.
If you can sleep at night knowing that lower prices will be partially offset by higher production, don’t price any wheat now. Then, if it doesn’t rain or snow, you may lose sleep worrying about the financial situation, but the wheat price will not keep you awake.
Most producers need to realize that prices will take care of themselves. There are price risk management tools available. These tools come with a cost. The question is, “Is the return worth the costs?” Or, “Are prices worth worrying about?”