Forward Contracts May Be Best Bet In Unsteady Wheat Markets
April 4, 2008
With unsteady wheat markets, some type of forward contracting may be the best way to take advantage of attractive prices if local grain buyers are offering forward contract bids, according to a speaker at UNL's Wheat Technology Conference.
"Kansas City futures have gone from $5 to $10, although they have only once been above $7 in all previous history," said John Deering, regional extension specialist in agriculture and business management for Colorado State University.
Producers can use forward pricing, hedge-to-arrive contracts and put options to gain some price stability, Deering said. Forward contracting is a good option because there are no margin calls and the producer doesn't have to put any money up front. If the market continues to climb, though, the contract price doesn't rise with it. The producer also risks paying cash to fill a contract if yield doesn't meet or exceed the amount contracted.
"That can be very expensive at today's prices," Deering said.
Hedge-to-arrive contracts pose the same advantages as forward contraction as well as the same production risk, Deering said. Hedge-to-arrive also exposes producers to some basis risk.
Put options allow producers to earn higher prices if the market goes up, but they can be expensive.
Both forward contracts and hedge-to-arrive contracts can be negotiated with local elevators or with grain merchandisers. Producers can take advantage of put options in a couple of ways, Deering said. Some elevators offer brokerage services. Many times, these transactions are completed by commodity brokers.
Deering doesn't expect wheat prices to settle down soon. Going into winter this year, the U.S. crop didn't look good, so continued high prices will depend on how the crop recovers.
Internationally, the Australian and Argentine crops matter a lot, as will the European crops.
"Last year, all of our competitors had crop failures but we can't count on that going into the future," Deering said.