It pays to store wheat this year, analyst says
Soft 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 U of I 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."