Market Advisor: Wheat Price Potential for 2001

by George Flaskerud, Crops Economist
NDSU Extension Service

Now is the time to put together your preharvest marketing plan for the 2001 wheat crop. Winter wheat acres and establishment are such that marketing opportunities may arise during the coming months. With a marketing plan, you can be prepared to take advantage of those opportunities.

An example marketing plan could be to sell 10 percent of the anticipated wheat crop when the Minneapolis spring wheat 2001 December futures price reaches $3.80 or by April 19, 2001, whichever comes first. An additional 25 percent could be sold when the price reaches $4.00 or by May 17, 2001, and an additional 30 percent could be sold when the price reaches $4.25 or by November 15, 2001.

These are lofty price objectives relative to current prices but not out of line with futures prices for the 2001 crop. Minneapolis spring wheat 2001 September futures closed at $3.55 on Nov. 21 and exceeded $3.70 in mid-October. I would expect the December contract would be at least 10 cents higher than the September contract when it is quoted.

Supply and demand conditions for wheat could justify those prices if all wheat acres are down 2 percent from a year ago and all wheat production is 190 million bushels below trend yield production. A hard red winter wheat yield 6.4 bushels per planted acre below trend, such as in 1996, could result in the 190 million bushel reduction. This is strictly a "what if" scenario. Yield will be heavily dependent on weather during the winter and especially next spring.

Further, this potential supply and demand scenario would be relevant only until higher prices are realized. If Minneapolis December futures reach $4.25, what will happen to spring wheat planted acres in 2001? They would very likely increase. With good yields, prices could drop sharply by fall.

So, if and when the price objectives are reached, the plan needs to be implemented. Selling one-third of anticipated production using a futures fixed contract and one-third using put options would manage an enormous amount of price risk. A floor price is established on two-thirds of anticipated production while the price is still open to the upside on two-thirds.

What if the price objectives are not reached? A backup must be in place. In the example marketing plan, time deadlines are the backup.

Time deadlines are derived from the seasonal price pattern for wheat. Those times of the year when futures prices and cash prices are usually the highest are picked as selling deadlines. Seasonal price patterns for many of the crops produced in North Dakota are presented in North Dakota State University Extension Service Bulletin EB-61, "Seasonal Price Patterns For Crops." The publication is available on the Internet at http://www.ext.nodak.edu/extpubs/market.htm.

The marketing plan need to be reviewed and adjusted as new information becomes available. The next very important USDA report will be the Winter Wheat Seedings Report, which will be released Jan. 11.

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu