Wheat may be forward contracted in Oklahoma and the Texas Panhandle for harvest delivery at 40 cents less than the KC July wheat contract price, or about $6.60 ($7.10 – $0.40). On February 3, wheat could have been forward contracted for $5.60. The $1 price increase is due to relatively tight U.S, wheat stocks, the funds buying wheat futures contracts, declining wheat crop conditions, and the political situation in Ukraine. These market factors are listed in their order of importance.
The USDA will release new projections in the March WASDE report Monday, March 10. U.S. hard red winter wheat (HRW) ending stocks are projected to be 181 million bushels (mb) compared to 343 mb last year and a five-year average of 320 mb. HRW wheat ending stocks are projected to be 44 percent below average. Total U.S. wheat ending stocks are projected to be 558 mb compared to a 5-year average of 770 mb, or 28 percent below average.
Another reason for higher prices is that the funds have been buying wheat futures contracts. Tight stocks is one reason funds are buying wheat contracts. Another reason may be because 25 percent of Oklahoma's, 22 percent of Kansas's, and 46 percent of Texas's wheat crop are rated poor to very poor. These ratings are down from Oklahoma's 5 percent, Kansas' 4 percent, and Texas' 28 percent poor to very poor ratings on November 25, 2013. Relatively poor condition ratings don't guarantee that HRW wheat production will be below average. It just increases the odds that the production will be below average.
Except for tight wheat stocks, the market factors discussed above could change quickly. The question that producers should be asking is: "Which will hurt me worse, forward contracting for $6.60 and not having the opportunity to sell wheat at $7.50, or not forward contracting wheat for $6.60 and having to sell wheat at $5.50?"
Follow through from your answer to the questions above. In my opinion, you should consider forward contracting 10 to 20 percent of your expected production. If you hedge rather than forward contract, be prepared to make relatively large margin calls. With relatively tight stocks, lower than expected 2014 wheat production could result in relatively larger price movements. On the other hand, if U.S. and world wheat production is above average, wheat prices could be in the low $5 range by Dec 1.
There just has to be a way to know when to sell wheat and when to store it. In reviewing some old files, I found a one-page guide on how to determine which marketing strategy to use at harvest. The strategies included sell cash, hedge, store, and option strategies. The signals were if the basis and/or the KCBT Dec futures price were above or below normal. I collected cash prices, basis and futures prices from 1970 to present and evaluated the signals. The result was that the basis is a relatively good indicator if a storage hedge will work. The futures price was useless as a signal.
The research is not complete, but my expected conclusion has been published by Carl Zulauf (Ohio State University) and Scott Irwin (University of Illinois), "With few exceptions, the field crop producers who survive will be those who have the lowest cost of production because efforts to improve revenue through better marketing of the commodity produced will meet with limited success over time."..."A good marketing program starts with a good program for managing and controlling the cost of production."