Selling wheat may be relatively easy. What may complicate the situation is selling wheat based on price predictions.
For many producers, what makes selling wheat frustrating is that they believe wheat prices can be predicted. Research shows that wheat prices cannot be predicted with sufficient accuracy to make selling based solely on price outlook profitable. Once this fact (non-predictability of prices) is faced, selling wheat may be relatively easy.
One strategy is to sell all the wheat at harvest. Scott Erwin and Derrell Good, University of Illinois (AgMas), compared different selling strategies for the wheat marketing years 1995 through 2004. They subscribed to market advisory services and simulated net returns based on advisory services’ recommendations. The best strategy was to all sell wheat at harvest.
A selling strategy that some producers use is to sell wheat in thirds: one-third at harvest, one third during late September and early October, and the final third in November/December. This strategy allows the producers to always be right. If one-third of the wheat is sold at harvest and the price goes up, two-thirds of the wheat is still available to sell at the higher price. If the price declines after harvest, at least one-third was sold at the higher price.
The thirds strategy may be modified. In June/July 2014, wheat prices were about $1 above the five-year average. Some producers sold one-half of their wheat at harvest and the other half in increments of one-fourth.
If prices remain well below average in 2015, producers may modify the thirds strategy by selling one-fourth at harvest and then selling the rest in two lots of three-eighths each.
Research conducted at Oklahoma State University shows that over the last 10 years selling all wheat at harvest and buying “at-the-money” KC December wheat option contracts produced the highest average net price, compared to selling at harvest, using the thirds strategy, or using put options. The research also showed that the “call option” strategy never produced the highest net price within any marketing year.
Wade Brorsen and I used nine years of grain elevator wheat purchase data to evaluate which producer cash strategy worked best. We found that over the nine year period timing of cash sales made little difference in the average price received. Whether the wheat was sold at harvest, split (thirds) sales were used, or the wheat was all sold in the fall mattered very little.
Research also shows that selling wheat at harvest and buying KC December wheat futures contracts produced the lowest net price of all the strategies analyzed.
Many methods for selling wheat are available, and most of them work relatively well. Brorsen and my research showed that only about 20 percent of the wheat was sold in the bottom third of the market and this wheat was stored too long. The research indicated that wheat should be sold before January 1 of each marketing year.
When it’s time to sell, a question to ask is: “Which decision will let me sleep tonight, selling or storing?” If selling the wheat and then worrying about prices going up is going to keep you awake, store it. If storing the wheat and then worrying about prices going down is going to keep you awake, sell it. If both selling and storing wheat keeps you awake, sell some and hold some.
There is no perfect way to sell wheat. Across the marketing years, few strategies outperform any other strategy. If you accept this as fact, selling wheat is easy.
Then you can concentrate on what makes a difference in profit, managing costs.