Post-Harvest Winter Wheat Marketing Strategies

Post-Harvest Winter Wheat Marketing Strategies July 11, 2017

When developing a post-harvest marketing plan, your objective should be to obtain a higher price than the cash price offered at harvest. This article will discuss five strategies to post-harvest market winter wheat.

We are going to assume winter wheat harvest in Nebraska begins around July 1. The futures price of wheat on July 3, 2017 was $5.41/bu.

Figure 1 illustrates the 20-year average winter wheat futures price pattern, and upper and lower limit of the expected price change from July 1. The 20-year average shows winter wheat prices are traditionally lowest at harvest and then increase about 8% above the July 1 price. However, the upper and lower price expectation limits illustrate that wheat prices are highly volatile. These upper and lower limits illustrate that storing unpriced wheat is risky. This is especially true after August, when price changes from July 1 can be 20% higher or lower than the average expectation.

Chart of post-harvest wheat markets
Figure 1. On average, winter futures prices for winter wheat increase 8% over the harvest price (July 1), but it is risky to store unpriced wheat, as this market is very volatile.

Strategy 1: Sell at Harvest

Winter wheat producers have experienced situations in recent years when prices have been highest at harvest and gradually declined throughout the year, like in 2014/15 and in 2015/16. If you are concerned about declining prices after harvest and are satisfied with the current cash price, you could sell your winter wheat to the elevator at harvest. This would eliminate the risk of prices declining after harvest and the expense of any additional storage, but it also would eliminate the opportunity to take advantage of price increases.

Strategy 2 & 3: Minimum Price Contract or Put Option

If you want to protect yourself from falling prices, but still want to take advantage of price increases later in the year, you have two options:  a minimum price contract or a put option. Both a minimum price contract and a put option set a price floor, allowing you to obtain a higher price later if the opportunity arises.

If you do not expect the basis to improve or if you expect it to weaken, consider a minimum price contract. A minimum price contract does as its name states; it sets a minimum cash price with the local grain buyer. Elevators charge a fee for minimum price contracts, and often require at least 1,000 bushels per minimum price contract. Speak with your local elevator about the provisions and risks associated with these types of agreements.

A put option only sets a floor for the futures price; it does not establish a basis. If the put option is purchased while you have unpriced grain, the option leaves you open to the risk of declines in basis. Some farmers sell their grain across the scale at harvest, establishing a basis and putting cash in their hands. Then they buy a put option to ensure they can take advantage of price increases. Put options require a licensed broker. Brokers charge a fee for options contracts, in addition to the premium paid for the option. Speak with your broker about the risks associated with these types of agreements.

Strategy 4 & 5: Cash-Forward Contract or Hedge-to-Arrive Contract

If you are not interested in a minimum price contract or a put option and you can store winter wheat on the farm, another opportunity to mitigate price risk is to enter a cash-forward contract or a hedge-to-arrive (HTA) contract. These contracts allow you to price grain today for delivery at a later date. Selecting between these contracts depends on your expectation of local basis.

A cash-forward contract should be used when you believe that basis will be stagnant or weaken. This contract simply establishes the cash price of wheat to be delivered in a future month.

An HTA contract establishes a futures price at the time the contract is signed and allows you to establish the basis at a later date. This contract should be used when you expect basis to improve.

Both a cash-forward contract and an HTA contract guarantee delivery of grain at a future date to your local elevator. To evaluate the profitability of these options, you’ll need to assess the carry charge. A carrying charge is the difference between two futures contracts; it is also called a spread.

Table 1 shows the 20-year average carrying charge between Kansas City winter wheat contracts from July until December. Usually, when the July contract (KWN) is the nearby contract (May 15- Jul. 14), there is a $0.08/bu difference between the July and September (KWU) contract. In other words, on average, the grain buyer will pay you $0.08 to store your winter wheat until the September delivery period. However, you will accrue additional storage expense; in this example the charges would be for an extra two months (July 1 to September 1). If your storage expense is less than the carrying charge, it may be profitable for you to enter a cash-forward or HTA contract.

Table 2 shows that current carrying charges are higher than the 20-year average. Farmers willing to store winter wheat on farm until September have the opportunity to gain a premium of $0.17/bu minus the additional storage expense. Those able to store until December could obtain a $0.42/bu premium and those waiting until Mrch could get $0.56/bu, but they also will have incurred more storage expenses.

Table. 1. The winter wheat market carrying charges, or spreads, are typically large enough to encourage producers to store priced wheat using a cash-forward contract or hedge-to-arrive contract.
1997-2016 Average Carrying Charge ($/bu)
May 15 – Jul. 14
1997-2016 Average Carrying Charge ($/bu)
Jul. 15 – Sep. 14
1997-2016 Average Carrying Charge ($/bu)
Oct. 1 – Dec. 14
Current Contract KWN KWU KWZ
1st Deferred Contract (KWU) $0.08 (KWZ) $0.15 (KWH)$ 0.06
2nd Deferred Contract (KWZ) $0.22 (KWH) $0.24 (KWK) $0.05
3rd Deferred Contract (KWH) $0.30 (KWK) $0.23 (KWN) -$0.05

Table. 2. Current winter wheat market carrying charges offer a $0.17 to $0.56 premium per bushel, if farmers will store grain until a later delivery period.
Contract Date Current Carrying Charge ($/bu) 1st Differed Carrying Charge ($/bu) 2nd Differed Carrying Charge ($/bu) 3rd Differed
KWN17 KWU17 KWZ17 KWH18
6/23/2017 $4.64 $0.18 $0.44 $0.58
6/26/2017 $4.53 $0.19 $0.44 $0.59
6/27/2017 $4.57 $0.19 $0.44 $0.58
6/28/2017 $4.62 $0.19 $0.44 $0.59
6/29/2017 $4.81 $0.19 $0.44 $0.58
6/30/2017 $5.11 $0.18 $0.43 $0.56
7/3/2017 $5.41 $0.18 $0.43 $0.56
7/5/2017 $5.51 $0.18 $0.43 $0.56
7/6/2017 $5.31 $0.16 $0.42 $0.55
7/7/2017 $5.27 $0.17 $0.42 $0.56

Summary

Wheat producers have five contracts they can use to mitigate price risk. Cash sales at harvest mitigate price risk if a farmer is satisfied with the current cash price. Minimum price contracts or put options allow farmers to protect themselves from price decreases while taking advantage of any price increases. Farmers with wheat in on-farm storage could enter a cash forward contract or HTA contract to deliver grain later in the year and obtain a premium over taking the cash price at harvest.

Remember, past performance is not necessarily indicative of future results. Grain marketing involves risk, and you should fully understand those risks before pricing grain.