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Marketing alternatives and price risk

Research has shown that there may not be a single best time to sell wheat. Over a 15-to 20-year period there is little difference between the harvest/fall/early winter marketing strategies. The one definitive rule is to have wheat sold before Jan. 1. Prices tend to decline into late July or early August and then increase and peak in the November.

Producers who sell wheat in June will normally receive a higher price by selling at harvest. Producers whose harvest is complete in July may receive a higher net price by selling wheat in October.

To evaluate how marketing alternatives performed over the last 10 years, these assumptions were made. Storage cost is 3 cents per bushel per month. Interest cost is 1 cent per bushel per month (3.375 percent government loan rate) times the harvest price. Ownership cost for wheat in storage is 4 cents per bushel per month.

Ownership cost for 1 month is 4 cents, 2 months is 8 cents, 3 months is 12 cents, 4 months is 16 cents and 5 months is 20 cents.

The 10-year monthly average prices are June $3.20, July $3.15, August $3.18, September $3.30, October $3.38, November $3.41 and December $3.32. The highest average cash price was November’s $3.41. However, after adjusting for 4 cents ownership costs, selling in October producers a higher net price.

For June harvested wheat, July wheat prices averaged 5 cents less than June prices. August prices averaged 2 cents less than June prices and November prices averaged 21 cents higher than June prices.

For July harvested wheat, average August prices were 3 cents higher than July’s average. September prices averaged 15 cents higher and November prices averaged 26 cents higher than the average July price.

For producers who have the opportunity to sell wheat in June, selling in October (4 mo. storage) would net a 2-cent advantage over selling in June ($3.38 - $0.16 ownership). Selling in November (5 mo. storage) would net 1 cent over selling in June ($3.41 - $0.20 ownership).

For producers who harvest in late June and July, selling in October produces the highest net price ($3.26 = $3.38 - $0.12 ownership) compared to selling in July for $3.15 or a net November price of $3.25 ($3.41 - $0.16 ownership).

This analysis indicates that, over time, there is little risk in storing wheat until mid-October. After October, ownership costs (4 cents per month) and down-trending prices increase the risk of owning wheat.

Another alternative is to sell the wheat and buy KCBT Dec call option contracts that capture increases in the KCBT December wheat contract price. Over the last 10 years, the monthly average KCBT Dec wheat contract price declined 4 cents between June and November and gained 3 cents between July and November. An “at the money” Dec call option contract costs (premium) about 20 cents per bushel. The odds are that the 16 to 20 cent ownership costs will just offset the 20 cent call premium. The potential net is a 4-cent loss to a 3-cent gain.

Some producers store wheat and sell KCBT December futures contacts (storage hedge). The price gain would be due to a higher basis. Storage and interest is still paid (16 to 20 cents). The average basis gain between June and October is 19 cents. Thus, storage and interest would eliminate most of or all the storage hedge profit.

Selling wheat and buying call options or storing wheat and selling KCBT Dec futures contracts just about “breakeven” with selling at harvest. Storing until October nets about 4 cents over selling at harvest. If wheat has not been sold by mid-July, storing until October nets about 11 cents above selling in July.

If you want to spread price risk, sell one-third at harvest, one-third in late September/early October and the final one-third in November. The good news is that no matter what strategy you use, as long as wheat is sold before Jan. 1, over a 10 year period you’ll receive about the same average price.

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