Spring seeding and combining went better than expected for the most part across the Prairies and the crops are off to a decent start. Excess rains in some regions and dryness in others has caused some concerns but overall the crop is in and growing and looking good.
Weather forecasters are watching the current La Nada weather pattern in the Pacific waters and trying to determine if it will persist. La Nada would mean a hotter and dryer summer for a good portion of the U.S. grain-growing region and the Canadian Prairies. If the La Nada transitions into an El Niño pattern, we will see more temperate conditions through the summer, with moisture and moderate temperatures.
So far La Nada is holding on, causing weather issues across parts of the U.S. growing regions, in particular severe extended dryness in the spring wheat-growing areas of Montana and the Dakotas, which sparked a spring-time wheat rally. Recent rains across these areas will help temporarily relieve drought concerns, but there are many growing days left before harvest, and uncertainty has provided the prefect setup for a spring/summer weather rally for U.S. wheat futures which could potentially linger right through to harvest.
Marketing spring wheat
If you have already pre priced some wheat earlier in the $7 per bushel range for new crop delivery you are probably kicking yourself now, but remember that when you took those contracts conditions were different. Expectations were for another large world wheat crop, which wasn’t going to help reduce already burdensome stocks. At the time $7/bu. was a profitable price so you made a sound decision based on the facts at hand at the time.
The neighbour who procrastinated and hasn’t yet pre-priced any wheat is looking pretty smart, but more often than not, those who procrastinated in the past will continue to do so. They will likely watch prices hit a high and fall back down, then price at a level likely below the $7/bu. you locked in earlier. It’s the nature of the beast!
Looking back, what could you have done to get a better result based on how markets have played out so far?
Back in January to March when there were offers of $7/bu. for new crop wheat, once you signed the delivery contract you could have then bought a call option contract. This would have kept you in the market in the event that futures prices rallied — which they did. The cost to buy a call option would have likely been in the 35¢/bu. range ($12.85/tonne). It wouldn’t have been a cheap way to go. At that time, based on world stocks and other variables it seemed like a long shot that futures would rally, so why spend 35¢/bu. to protect yourself on a longshot?
Looking back, it’s easy to see what you should have done, but the world of farming and futures markets doesn’t allow you that luxury. All you can do is review your decisions for future reference, to help you make that next decision.
Marketing action now
This is a good time to reassess your yield potentials and re-examine your cost of production.
If current market prices are high enough to give you a profitable return, decide if you should pre-price more of your crop. If you do, should you buy a call option contract so if futures climb higher you will gain that value back? In a volatile market, target price contracts are a good way to pick off high prices.
Another strategy is to use a put option to set a floor price for your grain. If the futures continue to go higher, you can lock in your actual delivery contract at the elevator at the higher price at a later date. If futures prices fall, the put option has you protected, and you can wait until you know your grade before actually pricing any of your crop, reducing grading risk and potential contract buyback costs.
Marketing is not easy, and there is never a 100 per cent right answer as to if or when you should sell. Once you come to grips with that, you will start making better decisions based on the information you have at hand.