During the last month, cash wheat prices in Oklahoma and Texas increased 88 cents and then declined 14 cents. KC March contract prices increased 89 cents and then declined 25 cents. A 10 cent increase in the basis occurred on December 3, which was probably due to lower transportation rates.
At this writing, the KC July 2015 wheat contract price is $6.40. Forward contract basis for June 2015 delivered wheat in Oklahoma and the Texas Panhandle are mostly between a minus 22 cents to a minus 50 cents. Using minus 30 cents, wheat may be forward contracted for harvest delivery for $6.10 per bushel.
Given that the projected harvest price is $5.50, $6.10 may be an attractive price. Some producers are pricing 10 percent to 25 percent of their expected production.
Another alternative is to buy a KC July put option contract. At this writing, a $6.40 (at-the-money) KC July put option contract may be purchased for about 40 cents per bushel or $2,000 per 5,000-bushel contract. This purchase would establish an expected minimum price of $5.70 ($6.40 - $0.40 premium - $0.30 expected basis).
A $6 ($0.40 out-of-the-money) put may be purchased for about 25 cents. This would establish an expected minimum price of $5.45. By buying a 40-cent out-of-the money put option contract, 25 cents are given up on the expected minimum price ($5.45 vs. $5.70), and 20 cents is gained with the premium.
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Some analysts report that the recent 88-cent wheat price increase was mostly due to the funds closing short wheat positions. The positions were closed because the fund analysts predicted that wheat prices had bottomed out, and that the odds were higher that wheat prices would move sideways to higher rather than decline.
Factors that led to this prediction were lower predicted wheat production in Australia, rumors that Russia would restrict the export of “quality” wheat (protein and test weight), a lack of wheat quality available for export by other exporting countries, lower protein than normal wheat being exported out of Canada, and the availability of relatively high protein and test weight wheat in the U.S. Also, some analysts report that the U.S. 2015 hard red winter wheat crop may have been damaged by recent freezing temperatures and relatively dry conditions.
With Argentina and Australia’s wheat harvests winding down, the wheat supply for the 2014/15 marketing year is essentially known. Thus, market analysts will concentrate on wheat demand and the condition of the 2015 wheat crop.
Reports are being made about the condition of the 2015 U.S. HRW wheat crop. But, most analysts know that the amount and timing of precipitation between March and June will be the biggest determinant of 2015 wheat production.
Knowing what prices are going to do between now and June 2015 is impossible. What is possible is that you know the cost of production, know how much financial risk you can take, and that you have a plan to sell your wheat.
Be sure to consider that higher than expected (current expectations) wheat production will result in lower prices. Lower than expected wheat production will result in higher prices. Higher yields (production) partially offset lower prices, and lower yields are partially offset by higher prices.
With that said, taking advantage of an 88-cent price increase with a small amount of expected production is rarely a mistake.