By Jessica Groskopf, Cory Walters
Since the start of the 2019 UNL-TAPS wheat marketing competition, the July 2020 Kansas City Hard Red Winter Wheat Contract has rallied over $0.70 per bushel. So, what are some marketing strategies given the current market price? The answer to this question depends on your expectation of where the price will go from here and your farm characteristics.
Developing a Pre-Harvest Grain Marketing Plan
When developing a pre-harvest grain marketing plan, the first question you need to ask yourself is how much wheat are you expecting to produce? Next, you need to ask yourself how much grain are you comfortable pricing before harvest? A widely accepted rule of thumb is not to pre-harvest market more production than you have insured. However, the current price rally plus your fields growing conditions may encourage you or discourage you from marketing more or less than your insured amount.
A pre-harvest grain marketing plan should break your anticipated sales into smaller units, and outline specific price targets and sales deadlines. This allows you to compare the current price to your marketing goals, removing some of the emotion from marketing.
The next question you must ask yourself is, will the market continue to rise or will it begin to fall? Followed by, how am I going to take advantage of price increases, while protecting myself from price declines? There are several different types of contracts available depending on your expectations of the market.
If you believe futures prices are going to increase, here are a few contracts you can use to market your wheat.
- Do nothing - That's right, do nothing. If you think that the market is going to continue to rise into the growing season, the first strategy is not contracting any grain. Not locking yourself into contract allows you to take advantage out of futures price increases. However, this decision leaves you vulnerable to price decreases.
- Basis contract – A basis contract is a nifty option when futures prices are on the rise. This contract allows you to lock in the harvest basis price with your local elevator now, and the set the futures price later. These contracts usually have a fee of $0.01 to $0.02 per bushel. A basis contract eliminates the risk of harvest basis widening while allowing you to capture gains in the futures market. Like cash forward contracts, basis contracts lock you into delivery at your local elevator.
- Minimum price contract – Some elevators offer a minimum price contract. This contract locks in both the futures price and basis. However, if the futures price increases you can elect to increase the futures price component. These contracts have a fee associated with them. Most elevators require that you contract in units of 5,000 bushels.
If you believe futures prices are going to decrease, here are a few contracts to lock in these higher prices now.
- Sell wheat now, for harvest delivery – If you are happy with the futures price and the basis you can contract grain at the "new crop" cash bid at your local elevator. This strategy locks in both the futures price and the basis, eliminating downside risk. However, it also eliminates upside potential. Cash forward contracts can usually be made for any amount, and typically do not carry a fee.
- Short Hedge – Farmers wanting to protect themselves from price declines can sell futures contracts now at current prices, and buy them back later at lower prices when they sell grain in the cash market. Short hedges protect you from declining prices but do not lock you into a delivery location. There are fees associated with placing and lifting the hedge as well as margin calls (costs when futures prices continue to increase).
- Put option – Buying a put option, grants the purchaser the right to place a short hedge at a specified price often called a "strike price". This strategy charges a fee, called a premium. If the futures market ends up below the put option strike price, the holder can either sell the put at its current value or exercise their put and sell the futures contract. If futures prices continue to rise the holder gets the difference between the futures price when selling and the premium for purchasing the put option.
You may feel pressure to sell a lot of grain during the growing season this year. Caution must be given to not oversell. Although price risk is reduced by pre-pricing, dryland producers especially are still exposed to yield risk. Farmers who are unable to deliver contracted grain must understand how their elevator will charge you. If your contract price is higher than what is offered at harvest, do you get some or all of the difference? Can you find someone to deliver on your futures contract while providing them a higher price? If your contract price is lower than what is offered at harvest does the elevator allow you to roll the futures contract into next year or do you owe them the difference plus associated buyback fees? Having a conversation about extreme events with your elevator will not only help you identify your options but may also give you more confidence in selling on price rallies as you know what you can do in case things go awry.
Grain marketing involves risk, and you should fully understand those risks before pricing grain.
Source : unl.edu