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March 24, 2005 Market Advisor: Spring Wheat Pricing Opportunity
Spring wheat futures prices have reached a level that many producers did not believe possible just a month ago. With normal growing conditions, prices are likely to be a lot lower by harvest. However, a lot can happen between now and harvest. Minneapolis December futures reached $3.93 on March 16, an increase of about 60 cents since mid-February. Only once since 1997 has the monthly average of Minneapolis December futures been more than $3.93 during November. Futures easily could give up those 60 cents by harvest if acres, yields and use turn out generally as expected. Yields are the biggest uncertainty and will have the most impact. My analysis used yields that reflect very good conditions for hard red winter wheat and five-year averages for the other classes of wheat. Ending stocks of all wheat for the 2005-06 marketing year are likely to be 550 million to 600 million bushels. USDA’s March projection for the current marketing year is 553 million bushels. Last November, Chicago December futures averaged $3.03. On March 17 of this year, Minneapolis December futures were only 5 cents higher than Chicago December futures. That 5-cent difference is very low relative to historical relationships. A difference of 20 to 40 cents is more likely. Thus, it is reasonable to expect that Minneapolis December futures could average $3.10 to $3.50 next November, considerably lower than the $3.93 on March 16. There also is the risk that better-than-average growing conditions could result in even lower prices. Price rallies into spring are not unusual. This rally has been driven in part by relatively tight U.S. and world wheat stocks and higher-than-expected export demand, especially for spring wheat. The rally also has been helped by strong soybean prices that threaten to take acres away from wheat. Spring price rallies, however, almost always give way to lower prices by harvest. In effect, Minneapolis December futures near $3.93 appear to be an above-average selling opportunity. Consider selling any remaining 2004 spring wheat at the elevator cash price. For the 2005 crop, consider selling using a cash forward contract for harvest delivery, if it reflects an average or better basis. Otherwise, consider using a hedge-to-arrive contract in the December futures for November delivery. Contracting should be limited to the guaranteed yield in crop revenue coverage or revenue assurance (harvest option) crop insurance. For anticipated production above the guaranteed yield, put options should be used if December futures move into the $4.20 to $4.40 range. Consider using at-the-money put options in the September contract. On March 31, USDA will report planting intentions. My analysis assumed that spring wheat acres would be up about 2 percent and durum acres would be up approximately 5 percent. These increases would not recover the acres lost last year to prevent planting. For white wheat (winter and spring combined), I used an increase of 4 percent. In January, USDA reported that hard red winter wheat acres were down about 1 percent and soft red winter wheat acres were down about 20 percent. I used yields per harvested acre at 41.8 for hard red winter, 35.7 for hard red spring, 54.6 for soft red winter, 61.9 for white and 32.4 for durum. These yields would result in an average for all wheat types of 43.2 bushels per harvested acre, about the same as for the 2004 crop. ### Source:
George Flaskerud, (701) 231-7377, george.flaskerud@ndsu.edu |
Market Advisor: |
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North Dakota State University |
