Urbana, Illinois
June 1, 2009Soft red
winter wheat producers face a favorable pricing scenario heading
into harvest because of rising prices and an opportunity to earn
a large return from a storage hedge, according to University of
Illinois Extension Economist Darrel Good.
"Producers in Illinois typically do not store much wheat beyond
August following harvest because wheat is generally produced in
small quantities and does not compete well with farm storage for
corn and soybeans," Good said.
"Estimates of monthly marketings provided by the USDA indicate
that an average of 62 percent of the crop was sold for delivery
in June or July in the five crop years from 2003-04 through
2007-08," he said. "An additional 13 percent was sold in August.
On average, only 6 percent of the crop was sold after January
following harvest."
Monthly marketing estimates are not yet available for the
2008-09 marketing year since that year just ended on May 31.
Historically, selling wheat before, at, or immediately after
harvest has been a good marketing strategy since post-harvest
price changes, on average, have not covered the full cost of
owning and storing wheat. But that may not be the case this
year.
"For the 2009 crop, prices have moved higher since late April.
July 2009 futures, for example, are currently near $6.60, about
$1.30 higher than in late April. Bids for harvest delivery in
southern Illinois continue to reflect a relatively weak basis.
The average harvest delivery bid on May 29 was about $.96 under
July 2009 futures," Good said.
Still, that is a much stronger basis than the average of $1.76 a
year ago. Further price increases may occur on the basis of the
deteriorating condition of the winter wheat crop, a
late-maturing soft red winter wheat crop, delays in seeding the
spring wheat crop, and concerns about the corn crop. Any
additional price increases will encourage harvest sales in
Illinois.
"Producers may, however, want to more closely evaluate the
storage decision for the 2009 crop. There may be more potential
for post-harvest strengthening of the soft red winter wheat
basis due to a much smaller crop than in 2008 and the potential
to reduce year-ending inventories," he said.
Last month, the USDA projected 2009 soft red winter wheat
production potential at 422 million bushels, 192 million smaller
than the 2008 crop. Stocks at the end of the 2009-10 marketing
year will likely be less than 90 million bushels, compared to an
estimated 159 at the beginning of the year.
Any further reduction in crop size could reduce inventories even
more.
In addition to the potential for basis improvement, the wheat
futures market is currently reflecting a large carry.
"At the close of trade on May 29, September futures settled
$.265 above July futures and December futures settled $.225
above September futures. Slightly higher prices were offered
through May 2010, with May 2010 futures $.73 above July 2009
futures."
"The large carry, particularly from July through December,
reflects two changes in the specifications of the Chicago Board
of Trade wheat futures contract. The first of those changes is
in the structure of premium (storage) charges," Good said.
Prior to July 18, 2009, the maximum premium charge on futures
contracts is $.00165 per day (about $.05 per month). From July
18 through December 17 the maximum premium charge is $.00265 per
day (about $.08 per month). The larger premium charge is
reflected in the carry. The maximum premium charge from December
18, 2009 through July 17, 2010 returns to $.05 per month.
This “seasonal” premium charge structure will continue into
future years.
"The second change is that, beginning on September 1, 2009, the
par delivery grade will have a maximum of 3 parts per million of
vomitoxin compared to the current par grade of 4 parts per
million. Delivery of wheat with 4 parts per million will still
be possible after September 1, but at a $.12 per bushel
discount. That difference is also reflected in the magnitude of
the July-September spread," Good said.
The bottom line is that producers are faced with a $.50 premium
of December 2009 futures over July 2009 futures and a $.64
premium of March 2010 futures over July 2009 futures.
"The interest cost of holding wheat priced at $5.60 from July to
December, at 6 percent interest, is about $.14, and the cost to
March 2010 is about $.22. With no improvement in the nearby
basis, the carry reflects a return to storage of about $.36 from
July to December 2009 and about $.43 from July to March 2010."
"Basis strengthening, if it occurs, would add to those storage
returns. Returns to wheat storage are much larger than currently
reflected by the smaller carry in new crop-corn futures and the
inverted soybean market," Good said. |
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