NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
June 18, 1998
George Flaskerud, Extension Crops Economist
NDSU Extension Service
Spring wheat prices have fallen considerably over the last few months, but there is still a very real risk that they could fall a lot more. Buying a put option makes sense.
I am reluctant to suggest contracting. It's possible that seasonal price lows are being established as this is being read. Much uncertainty remains about wheat yields, especially in western North Dakota, Montana and Canada. Spring wheat condition ratings came in lower for the week ending June 14, continuing the trend down. We also have to get through the scab season. In addition, it's early in the growing season for most spring-seeded crops throughout the world.
The Minneapolis Grain Exchange spring wheat futures price could drop considerably into harvest if these fears are not realized. For the September futures contract, the Minneapolis Grain Exchange was at a 56 cent premium to the Chicago Board of Trade on June 16. During 1988-96, Minneapolis Grain Exchange September futures during the month of August, on average, ranged from 12 cents lower to 21 cents higher. During 1997, the premium averaged 66 cents in August because of concerns about the Australian wheat crop but dropped sharply in September.
Could the spread narrow because of an increase in the Chicago Board of Trade wheat price instead of a decrease in the Minneapolis Grain Exchange price? One way it could is if weather reduced anticipated corn production. A rising corn price could pull the wheat price up, especially on the Chicago Board of Trade. During 1983, dry weather increased the Chicago Board of Trade corn and wheat prices about 50 cents between June and September, while the Minneapolis Grain Exchange wheat price increased about 25 cents, which narrowed the spread by 25 cents.
Current fundamentals suggest that Chicago Board of Trade futures prices are more likely to fall than to increase. On June 12, USDA projected wheat carryover stocks for 1998-99 at 34 percent of total use, which would imply an average Chicago Board of Trade December futures price of $2.75-$3.00 during the month of November. During November 1990, USDA projected that ending stocks would be 40 percent of total use, and during November the December futures price averaged $2.53.
A Minneapolis Grain Exchange September put option with the right to sell at $3.40 would have cost $.10 on June 16, and a $3.50 put option would have cost about $.15. At the time, the September futures contract was trading at about $3.45.
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Source: George Flaskerud (701) 231-7377
Editor: Barry Brissman (701) 231-7866