June 9, 2010
Wheat-harvest reports coming in from Oklahoma couldn't be worse: Protein is consistently under 12%.
For anyone needing an update on the dismal state of affairs in the wheat market, the last thing we need is more low-protein wheat. We have so much of it, in fact, that at the Gulf there are no bids for anything less than 12%.
Some grain companies have even rejected wheat. We literally cannot even give it away.
While basis is wide enough to fly a Boeing 747 through, there is still a bright side for some farmers: Premiums for high-protein wheat have skyrocketed.
If you have on-farm storage and can verify the protein content of your wheat, you'll have flour mills clawing at your door. The premium in Kansas City for 12% protein HRW wheat is 20 cents/bushel. At 13%, the premium jumps to 65 cents.
And if you bring in wheat at 14%, you get a hefty 95-cent premium. Wheat under 11%, meanwhile, gets a 40-cent penalty.
One farmer in eastern Colorado shared his idea with me on how to cash in: Invest in a protein tester and store your wheat in Ag Bags if you don't already have on-farm storage. Doing the math, if you have 100,000 bushels and a 65-cent premium, that's $65,000 – an investment that more than pays for itself if you can contract with a mill or grain company.
But if you haul your wheat to the elevator like most farmers in Kansas do, chances are you're not going to see a single dime of that premium. Even if you brought in high-quality wheat at 14% protein, you're still going to get paid the same rate as everyone else. The elevator pockets the difference.
Justin Gilpin, CEO of Kansas Wheat, says that's a problem farmers shouldn't accept. Elevators today, he argues, aren't serving the farmer like they were meant to. It's the result of an out-dated system built decades ago where all the wheat in the state is pooled together under the cooperative system.
That system may have worked then, but today farmers aren't getting fair value for their wheat. Not in Kansas, anyway, where the local cooperative elevator system is still the norm.
If we need a model of what the Kansas wheat market could look like, all we have to do is look north. In North Dakota where farmers store most of their wheat on the farm rather than in an elevator, premiums are posted locally everyday and paid directly to the farmer. If it works there, it could work in Kansas, too.
How do you change a decades-old system that doesn't pay the farmer what his wheat is worth? It doesn't happen overnight, but it won't happen at all if farmers don't know the true value of their wheat.
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