Research has shown that selling wheat at harvest nets the highest average price. If wheat is sold at harvest each year compared to storing wheat in commercial storage and selling it later in the marketing year, the average harvest price has been higher than the average price after paying storage and interest and selling later in the marketing year.
Given that wheat prices are at or near the loan rate, putting wheat in the loan and storing it may be a more profitable option this year. What makes storage more attractive is that the interest rate for wheat in the government loan is 2.25 percent.
At 2.25 percent, the interest cost for storing wheat when the price is $2.85 is about 0.5 cents per bushel per month. This implies that the total cost to store wheat is the commercial storage costs plus the interest costs, or 3.5 cents per bushel. Commercial storage costs are assumed to be 3 cents per bushel per month.
If wheat is stored on farm, the carry costs may be lower than 3.5 cents per month. This implies that as long as the cash price is equal to or below the loan rate, the risk to own wheat is about 3.5 cents per month.
The risk to own wheat until Dec. 1 would be about 18 cents per bushel (5 months times 3.5 cents).
If wheat prices go below the government loan, the loan deficiency payment will make up most of the difference. One problem is that the Posted County Price (PCP) is used to determine the loan repayment rate and the LDP.
Currently, the PCP is about 14 cents above some local elevator prices. Unless the PCP comes in line with the local elevator price, there will be added risk in storing wheat if prices are below the loan.
Assume that wheat is placed in the loan at $2.84 and prices fall to $2.70. If the PCP were 14 cents above the local cash price, then the PCP would be $2.84. In this case, if the producer redeemed the wheat out of the loan at $2.84 and sold it at the local elevator for $2.70, there will be a 14 cent loss.
The market will probably keep this from happening. If there is a potential loss, producers will store the wheat until the nine-month loan expires and forfeit the wheat rather than paying the loan. The market needs the wheat and the government does not want it. Prices will adjust to get the wheat out of loan.
An alternative to storing wheat is to sell it and buy December call option contracts. The KCBT December contact price is $3.35 and a 340 December call premium is about 23 cents. This would be higher than the 18 cents it cost to store wheat until Dec. 1.
Call option contracts do not protect against increases in cash price due to higher basis.
Normally between June 20 and Nov. 15, the basis increases about 16 cents per bushel. If the wheat is sold, a $3.40 Dec call is purchased for 23 cents and the basis increases 16 cents, the total cost for selling and buying a call would be 39 cents (23 cent premium plus 16 cents loss due to basis gain).
It appears to me that at some point, the market must bid wheat out of the loan. This implies that wheat prices have to go above the loan rate or the PCP will have to fall to cash price levels.
The two ways to keep or get the price above the government loan is from higher futures prices or by bidding up the basis. Either way, putting wheat in storage and under the loan seems to make since this year.
As the cash price goes above the loan, price risk becomes the carry cost (3.5 cents/mo.) plus the amount the cash price is above the loan.
Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail [email protected] .