Opportunity lies in marketing wheat for 2007, 2008
Wheat prices have hovered near $3 per bushel for the past several years. With prices jumping to more than $5 per bushel in several areas this summer, many Nebraska farmers looked down the road and locked in these prices for a portion of their 2007 and 2008 crops.
Several options are available for producers looking at pricing either the 2007 or the 2008 crop. Both cash forward contracts and futures contracts will allow farmers to lock in the higher prices, and many took advantage of those opportunities earlier this year. As we look at prices today, there are still some opportunities to lock in prices above $4 per bushel.
As with all opportunities, there are some inherent risks that producers need to consider when forward pricing wheat. First, consider the risky nature of dryland wheat production in Nebraska. Any crop that is entirely rain dependent has seen its ups and downs in terms of yield over the past several years of ongoing drought. Coupled with the potential for hail, disease and other perils, the ability to deliver the amount of wheat promised is always risky.
Second, the pricing mechanism is critical. Have you chosen to price on a forward contract with the local elevator, use another tool with a local elevator, or use the futures market? As we look at production risk, it has historically been a good rule of thumb not to market more than half of the expected â€œaverageâ€ yield. This allows the farmer to cover his contracts even if yields decrease dramatically.
The real risk here occurs when prices run up to levels higher than the contract price and a producer has a poor crop. Having less wheat than the contract calls for and prices higher than the contract can force the producer into the market to purchase expensive wheat to be delivered for lower prices to fulfill a contract commitment. The simplest way to protect against this is to buy crop revenue or revenue assurance insurance on wheat production and not market more than the amount insured.
These insurance products are based on the price at harvest and will allow the producer an opportunity to cover losses.
For those producers entering into futures contracts, the risk of margin calls should always be a consideration. One concern with marketing a 2008 wheat crop on the futures market at this time might be the interest cost associated with margin money that is out there on a contract that will not expire for another 20 months. If you are considering this type of marketing strategy, be sure you have the financial resources to stay with the market for the long haul.
As with any marketing decision, knowing the cost of production and profit goals is critical. As we move forward with wheat planting, it does appear that prices are attractive and additional forward marketing opportunities may present themselves. As those opportunities are investigated, be sure that:
- The marketing tool you choose reduces price risk rather than adding risk; and
- You know how your crop is insured and how many bushels are insured before making a commitment to deliver.