How should you sell your wheat?

At this writing, the wheat market in central Oklahoma and the Texas Panhandle is offering about $3.21 per bushel. Since June, wheat in commercial storage has cost about 21 cents per bushel and about 12 cents per bushel interest. The net price for wheat sold in early January 2005 was about $2.88 ($3.21 - $0.21 -$0.12)

Wheat could have been sold on June 20, 2004, for about $3.40 per bushel.

It is easy to second-guess how you should have sold 2004-harvested wheat. A price review shows that just about any pre-harvest strategy beat selling at harvest and selling at harvest beat any storage strategy except a storage hedge.

On April 1, 2004, wheat could have been forward contracted for about $3.82 per bushel. If half of the expected production had been forward contracted and the reminder sold at harvest, the average price would have been $3.61, 21 cents higher than the June 20 price.

It cost about three cents per bushel per month ($0.001 per day) to store wheat in a commercial elevator. Interest for wheat in the government loan was about 1.5 cents per bushel per month. Thus, total cost to own wheat in commercial is about 4.5 cents per bushel per month.

For the 2004 wheat crop, the best marketing strategy was a storage hedge. This involved leaving the wheat in storage and selling a KCBT December wheat contract. On Nov. 15, the cash wheat price after storage and interest was $3.21.

The KCBT Dec contract was sold on June 20 for $3.94 and bought back on Nov. 15 for $3.50, producing a 44-cent profit. The net price received for the storage hedge was $3.65.

Note that my marketing strategy analysis starts in 1986 and this is the first year that the storage hedge has produced the highest net price. Fact is that until this year, the averages show that the storage hedge produces the lowest net price of all the strategies that are analyzed.

Selling wheat at harvest and buying a KCBT December call option contract produced a net price of $3.16 ($3.40 June cash price minus $0.24 premium). Storing wheat and buying a put option contract produced a net price of $3.36 ($3.21 Nov. 15 net cash plus $0.15 profit from the put).

Each wheat-marketing year is different and unpredictable. One problem is that U.S. winter wheat production is only about seven percent of the world's wheat production. Total U.S. wheat production is less than 10 percent of world wheat production.

The world's major wheat harvest is in late August and September. The Southern Hemisphere's (Argentina and Australia) wheat harvest is mostly between November and January. It is difficult to predict prices in June knowing less than 10 percent of the world's wheat production.

Common advice is to “make decisions that are normally right and avoid decisions that are normally wrong.” A review of past marketing strategy outcomes may help identify which marketing decisions are normally right and which ones are normally wrong. The following review assumes that the same marketing strategy is used each year between 1986 through 2004.

The average April 1 forward contract net price was $3. The average June 20 cash price was $3.02. The average Oct. 15 net price (cash price minus storage and interest) was $3.05. The average Nov. 15 net price was $3.03. The average Dec. 15 net price was $2.98.

Selling wheat at harvest and buying KCBT December call option contracts produced a net price of $3.05. Storing wheat and buying put option contracts produced a net price of $3.01. And the storage hedge produced a net price of $2.94.

Three independent research projects conducted at Oklahoma State University imply that, over a 10 to 15 year period, the net price received will be about the same irrespective of the marketing strategy used. The research shows that wheat should be sold before January 1 and that the storage hedge rarely produces the highest net price.

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