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Wheat producers receive higher price than market analysts

Southwest Kansas wheat producers received a higher average price than the average of market advisory services. This was part of a 10-year study (1995-2004) by the University of Illinois using data from southwest Kansas hard red winter wheat farms.

Over the 10-year study, the average price received by southwest Kansas wheat farmers was $3.11. If the advice of the advisory services had been followed, the average price that would have been received was $3.05. If the wheat had been sold at harvest, the average price received would have been $3.20.

Two conclusions of the study were; there is “no evidence that advisory services consistently beat market or farmer benchmarks in wheat” and there was “no evidence that pricing performance of advisory services in wheat can be predicted across crop years.” These conclusions imply that wheat producers, on the average, beat the experts.

Additional information about this study may be obtained by using Google or Yahoo to locate farmdoc:AgMass or by contacting D. L. Good or Scott Erwin at the University of Illinois.

The point is that the experts cannot predict prices and the only way to “beat the market” is if prices can be predicted. I personally do not believe anyone can predict the market accurately enough to help producers “beat the market.” Several research projects support this belief.

At this writing, wheat may be forward contracted in some locations in Oklahoma and Texas at 60 cents under the KCBT July wheat contract price. The KCBT closed at $9.15 and wheat may be forward contracted for $8.75. Some producers are concerned that they will miss the opportunity to sell wheat at $8.75 or higher.

The high price for the KCBT July wheat contract was $9.84. The high July contract closing price was $9.67. The highest possible forward contract price offered, at this writing, was $9.24 ($9.84 - $0.60). What are the odds of anyone capturing that price or even knowing that that was going to be the high price?

Producers are already “beating the market.” Research shows that they are “beating the experts!” Producers need to quit worrying about getting the highest price and concentrate on management practices that they can control.

Some will say, “I can control the price I get.” I respond, “You cannot control the average price for your 2008 wheat crop because you have no idea how much wheat you will harvest.” You can “lock-in” a price by forward contracting, hedging or buying put options, but you will have no idea if that price is the “highest.” Only time will let you know that, and then it is too late.

Some producers forward contracted or placed hedges when the KCBT July wheat contract price was near $7. They “locked-in” a harvest delivery price of about $6.50 and, if they placed a hedge, they have made over $13,000 in margin calls for each 5,000-bushels contract. At the time, $6.50 was an excellent price and it may still be at harvest.

Producers should spend time and energy managing things that they can control: things like soil tests and budgeting to determine how much nitrogen fertilizer is needed to assure yield and protein. Producers should scout for green bugs, armyworms and identify other manageable problems before yield and quality is reduced. All these have higher odds for increasing profit than spending time predicting prices.

The only time that producers receive a payment is when the wheat is sold. Every other management practice is a cost, which is why “marketing” is so visible and producers tend to think that marketing is the most important management decision. Research shows that “marketing” is not the most important management decision.

Research shows that producers are beating the “experts.” Most producers sell in the upper one-half of the market and that, over time, most marketing strategies work. The “cardinal sin” in marketing is to not have the wheat sold by December 1.

My advice is to develop a written marketing plan, have the discipline to follow the plan and not to listen to outlook market economists.

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