September 6, 2001

Market Advisor: Market Signals Vary By Crop

by George Flaskerud, Extension Crops Economist

Futures prices, basis and storage costs are marketing factors and currently they suggest different strategies for different crops. In some cases, a change in the form of ownership such as a minimum price contract or a basis fixed contract instead of physical farm storage may be warranted. For other crops, cash sales may be the best decision. The marketing decisions made will impact cash flow and profitability.

A change in the form of ownership may be warranted for a substantial amount of spring wheat during the October-December period. Stored wheat might be sold on a minimum price contract (MPC) or basis fixed contract. These contracts would take advantage of anticipated strength in the basis while benefitting from unexpected increases in futures prices. These contracts would also facilitate cash flow.

The MPC would be less risky than a basis fixed contract. Both contracts would be tied to some distant futures price, such as Minneapolis May futures, which is at a premium to the December futures. May futures could decrease if USDA’s projected exports fail to materialize and winter wheat growing conditions are favorable.

A strengthening of the wheat basis is expected, especially during the next several months. In late August, the nearby basis at Hunter was about equal to the 1991-00 olympic average (lowest and highest values dropped when calculating the average) for September. That average strengthened from negative 35 cents in September to negative 21 cents in November to negative 11 cents in May. Tight stocks could result in a similar strengthening. (The olympic average was used in my analysis.)

Maintaining ownership of spring wheat in some form may be desirable considering the relatively tight stocks. Adverse weather during the winter wheat crop growing season could result in sharply higher prices.

Storage of spring wheat could also be profitable under a Commodity Credit Corporation (CCC) loan. However, using the CCC loan requires that a loan deficiency payment (LDP) has not been taken. The CCC loan has a much lower interest charge than a commercial loan ( 4.63 percent as of August 29). Storage under loan would also facilitate cash flow.

For corn, a storage hedge has generally worked well during the last couple of years. This hedge is established by using a futures fixed contract or the futures market. In both cases the July futures would be the best month for the hedge, according to my analysis.

It may be best to wait a month or two after harvest before initiating the storage hedge to give the market time to recover from harvest pressure. Early November and Late December were favorable times last year.

A strengthening basis and large carry in the futures market are important to a successful storage hedge. The monthly average nearby basis at Hunter last year improved from negative 61 cents in October to negative 39 cents in June. The basis improved by a similar amount two years ago. July 2002 futures were trading at a 20 cent premium to December as of August 29. Using July futures as of that date and last year’s basis could result in a price of $1.93 per bushel net of farm storage costs.

A CCC loan on farm-stored corn could give similar results. Compared to a storage hedge, however, corn under loan would be a riskier strategy since July futures could decrease. On the other hand, the loan strategy would benefit from a rising July futures prices. The basis would affect both equally.

For soybeans, an analysis of spreads and basis on August 29 indicated that every attempt should be made to capitalize on any preharvest frost concerns or postharvest recovery to make sales. The sales might be cash sales or an MPC. A call option three strikes out-of-the-money might be specified in the MPC to cope with South American weather uncertainty. At this time, South America is expected to produce another price limiting large crop.

For canola, the analysis of Winnipeg futures prices and Velva basis resulted in conclusions similar to those for soybeans. Since an MPC may not be available, the purchase of a canola call option on the Winnipeg Commodity Exchange would be necessary to offset cash sales.

For sunflowers, a futures market is unavailable to guide sales. But, can the situation for sunflowers be much different than that for soybeans and canola? Soybean oil call options or canola call options could be used to offset cash sales.

###

Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Gary Moran, (701) 231-7865, gmoran@ndsuext.nodak.edu