NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
July 30, 1998
George Flaskerud, Extension Crops Economist
NDSU Extension Service
The quality of this year's wheat crop will be crucial to spring wheat marketing decisions at harvest. Scab and protein are key factors that will likely determine the net price that you will receive when you sell your wheat. Here are some example strategies to consider in your marketing decisions that depend on those factors.
If you have good quality wheat that is 14 percent or better protein, selling off the combine may be the best strategy if substantial protein premiums are being paid. If the premiums are small, consider short-term storage. Protein premiums usually peak from September to November.
If you have poor quality wheat that is 14 percent or better protein, storage into November may be necessary. By then the discounts for quality should be lower and protein premiums should still be substantial.
Regardless of quality, if you have low protein, consider selling off the combine if protein and quality discounts are minimal. If the discounts are substantial, storage until the discounts are significantly reduced may be necessary.
Storage for the above reasons may be warranted. Storage does not look profitable for any other reason. There are less risky and potentially more profitable ways to speculate this year on higher prices later than through unwarranted storage.
In all of the example strategies, when the decision is made to sell, you may choose to make cash sales, use a contract, use the futures or use options. In many cases, the decision probably depends not only on market expectations but also on risk attitudes and cash flow considerations.
A minimum price contract (MPC) is a low-risk strategy. The grain is sold and the elevator manager buys a call option for you. The cost of the option is deducted from your selling price. The most you can lose is the cost of the option. If the futures contract increases, you make money.
An obvious advantage of the MPC over storage is that it costs no more than the cost of storage and probably less. A disadvantage would be that you could not benefit from any basis gain, that is, the potential gain from the cash price advancing faster than the futures price.
Cash sales and your purchase of options through a broker is an alternative to the MPC. Since production uncertainty is not an issue in the example strategies, I can see no advantage to this alternative over the MPC.
A basis contract is another possibility. The cash grain is sold and the elevator manager buys a futures contract for you. Usually, you would collect 75 to 80 percent of the cash sale proceeds at the time of sale and the balance when the futures contract is closed. The reason for the elevator manager retaining a portion of the proceeds is to cover any losses in the futures contract. You would also be liable for any additional losses.
This contract is riskier than an MPC because you are exposed to unlimited downside price risk. This contract is simply a substitute for selling cash wheat and buying futures yourself through a broker.
A combination of marketing strategies might be used. Diversification in marketing as in production is an excellent risk management practice. The best strategy depends on your attitude toward risk, your financial situation and your price expectations.
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Source: George Flaskerud (701) 231-7377
Editor: Barry Brissman (701) 231-7866