I’m standing in the church lobby, and a man comes up to me and says, “My mother has 36,000 bushels of wheat. When should she sell it?”
How do you answer that question? Remember, you are in church. The following are my thought process and answer.
Thought: 36,000 bushels times $8 equals about $300,000 ($288,000). WOW, we’re not talking loose change here. And I said, “Since the wheat is in storage, I suspect that she doesn’t need the money right now. Is there a date when she wants to have the wheat sold?”
Man: “My father passed away, and there is a tax issue. She would like to delay the sale until after January 1.”
What I try to do in situations like this is to determine what strategy or strategies are being considered. What do they normally do? In this case, neither strategies nor past experiences were available. The husband and dad had always handled selling the wheat.
I said, “There are several alternatives. The wheat may be left in storage until after January 1. Storage will cost about 4 cents per bushel per month ($0.16) and interest will probably be about 4 cents. Given $8 plus wheat, 20 cents is almost insignificant ($7,200). Price can change 20 cents in a day or two.”
In my mind, I was evaluating the wheat market situation: The current cash price is about $8.40, which is based on a KCBT Dec. wheat contract price of $8.80 and a minus $0.40 basis. The Dec. contract price stalled at $9 and may test $8.50 next week. A USDA Supply and Demand report is to be released in a little over a week.
The U.S. wheat price is above competing countries’ wheat export prices. The U.S. has lost export sales to Russia and Kazakhstan that are selling wheat at $0.75 to $1.25 per bushel less than the U.S.
The wheat harvest in the Northern Hemisphere is nearing completion, and the wheat crops in Argentina and Australia are looking pretty good. The USDA projects that U.S. and world 2011/12 marketing year wheat ending stocks will be slightly above average. Above average stocks normally imply below average prices.
The four-year average annual Oklahoma wheat price is about $5.80. The range of daily prices during the last two years is a maximum of $9.06 and a minimum of $3.61. Wheat prices did go above $12 in 2008, but I discounted that.
Current drought conditions in Oklahoma, Texas, and Southern Kansas increase the odds that the 2012 U.S. hard red winter wheat crop will be below average. This is important because after the Argentine and Australian wheat harvests, hard red winter wheat harvested in Texas, Oklahoma, and Kansas is the next available bread flour wheat to be harvested.
I said, “Between now and January 1, the downside price risk is about $1. Figuring 20 cents storage and interest, the risk is about $1.20 per bushels, or about $42,000.
“One strategy is to sell all the wheat on a delayed payment contract. The ownership of the wheat would be turned over to the elevator, the current price would be locked in, and the check would be received after January 1.
“Check with your mother’s tax accountant and determine the tax consequences of selling some wheat this year and some next. Then stagger the wheat into the market a little at a time – say in 6,000 bushel increments between now and March 1, 2012. This strategy would result in 6,000 bushels per month for the next six months.
“By staggering the sales over time, you will always be right. If prices go down, you sold some wheat at the higher price. If prices go up, you have wheat to sell.”
The man thought about it and said, “Staggering sales seems to be the way to go. (pause) Kim, you’re pretty smart.”
I said, “Yep, let me know what happens.”