Based on the KC December wheat contract price, the basis is already between minus $1.31 (southern Oklahoma and the Texas Panhandle) and minus $1.16 (north central Oklahoma) — and that may be good.

At this writing, the market is trading off the KC July wheat contract, where the basis range is between minus 95 cents to minus 81 cents, depending on the location.

Here’s the situation. The KC July contract price is 18 cents less than the September contract price, and 42 cents less than the KC December contract price. As the market rolls from the July contract to the September contract, the basis will decline 18 cents (July contract price 18 cents less than the September contract price). Then, when the market rolls for the September contract to the December contract (September contract price is 24 cents less than the December wheat contract price), the basis declines another 24 cents, with no change in the cash price.

That is is a total basis decline of 42 cents, with no change in the cash price.

PRICING OPPORTUNITIES

Market situations where deferred contracts are higher than nearby contracts may present pricing opportunities. Commercial elevators buy wheat from producers based on the July wheat contract price, and sell it (hedge) based on the December wheat contract price — potentially pocketing 42 cents.

The elevators hedge wheat by maintaining ownership and selling the deferred (December contract). At some point, the elevator must buy back the December futures contract, and then sell the wheat on the cash market (offset the hedge).

The elevators gamble that the minus $1.25 basis will gravitate (get higher) toward the current minus 83 cent July contract basis. The basis shift occurs by the difference between the cash price and the December contract price declining (basis=cash price–futures contract price). If the cash and futures contract price don’t converge, the elevator doesn’t earn the 42 cents.

Producers can do the same thing by putting wheat in storage and hedging it by selling KC December wheat contracts. The gain would be any improvement in the KC December basis, minus storage and interest costs (about 5 cents/month with commercial storage).

In the current market situation with little basis risk, the risk of lower prices is that the KC December contract price will decline.

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HEDGE POTENTIAL

Since November 2015, KC Nearby Futures contract prices have traded above the $4.30 price support level. If the basis does not change and the December contract price declines from the current $4.79 to $4.30, then the cash price would decline about 49 cents.

If wheat is not hedged, the owner would lose 49 cents. If wheat is hedged (owned in storage and sold using the KC December contract) and the basis remains at a minus $1.25, there would be no loss in the net price.

With the hedge, the wheat would be sold for 49 cents less than today’s price, but the December wheat contract would be offset (bought), for a net gain of 49 cents — which exactly offsets the lower cash price.

If the basis improves (i.e., minus $1.25 to, say, minus$0.83) and the hedge is offset, the net price will be a gain of 42 cents, minus storage and interest cost.

There may not be much basis risk — and that is good. But there may be a 50 cents price risk from lower KC futures contract prices.