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Post-Harvest Wheat Marketing Strategies – June 2020
DAVID L. REINBOTT
BENTON, MO.
Wheat harvest is just around the corner and I want to look at several post-harvest marketing strategies.
Storage Hedge
The storage hedge strategy has given consistent positive returns over the years but does have financial risks and additional costs. This strategy attempts to capture the basis improvement from harvest until winter utilizing on-farm storage.
The storage hedge has given a positive return 15 out of the past 15 years. In this strategy, a short hedge (Sell March Futures) is placed at or soon after harvest and the wheat is stored on-farm. The hedge is lifted when the wheat is sold in December through March to capture the improvement in basis.
In this strategy, variable storage costs are calculated at 6 percent interest plus 1 cent per bushel per month. The wheat is placed in on-farm storage on June 15 and held in storage until December 1, January 1, February 1, and March 1 when the wheat is sold and the hedge is lifted (buy back March Futures). The 10-year average net returns are the following: December 1, +30 cents/bu., January 1, +35 cents/bu., February 1, +34 cents/bu., and March 1, +25 cents/bu.
The 7-year average returns have also been positive: December 1, +25 cents/bu., January 1, +29 cents/bu., February 1, +26 cents/bu., and March 1, +14 cents/bu.
Storage Unpriced
Another popular strategy is to store wheat unhedged from June 15 until December through March. Variable storage costs are calculated at 6 percent interest plus 1 cent per bushel per month. This strategy has given mixed results over the years. Over the past 10 years, it has given positive returns only 4 years. The goal of this strategy is to take advantage of any improvement in basis and/or futures prices. The 10-year average net returns are the following: December 1, +11 cents/bu., January 1, +8 cents/bu., February 1, +8 cents/bu., and March 1 -14 cents/bu.
The 7-year returns have not been as positive: December 1, -31 cents/bu., January 1, -40 cents/bu., February 1, -49 cents/bu., and March 1, -62 cents/bu.
While this strategy has given some big results in some years, the year to year returns varied greatly from +$3.61/bu. to -$1.80/bu.
The major disadvantage of the two storage strategies is that it requires purchasing additional grain storage just for wheat or tying up grain bins for six months or longer that will not be available for corn and soybean storage. In addition, the returns to the two strategies do not include the in and out storage costs (you never take out as many bushels as you put in the bin), insect control, extra drying and aeration, fixed bin costs, and additional labor and management. These additional storage costs could easily run an extra 20 – 40 cents per bushel.
Short term strategies.
Shorter-term strategies of storing wheat either hedged or unhedged until August or September have also given mixed results. The 10-year average net returns for a storage hedge to capture the basis improvement from June 15 to August 1 was –22 cents/bu. and to September 1 was -36 cents/bu. The 10-year average net returns for storing the wheat unhedged for the price appreciation from June 15 to August 1 was -4 cents/bu., and to September 1 was -35 cents/bu.
Selling Wheat at harvest and selling a futures contract.
Selling a March futures contract after a harvest sale is another way to add value. This strategy that has been successful 8 out of the past 10 years. In this strategy, the wheat is sold at harvest and a March futures contract is also sold. The short futures position is held until the March futures contract is bought back. Following is the 10-year average net returns for this strategy from June 15: to August 1, -19 cents/bu., September 1, -2 cents/bu., October 1, +16 cents/bu., November 1, +8 cents/bu., December 1, +18 cents/bu., and January 1, +26 cents/bu. The three, five, and seven-year average returns over the same time period was even more dramatic. The returns were in the +40 to +60 cents/bu. range. While the net returns were positive, there were some wide variability in returns from year to year from +$2.05/bu. to -$3.14/bu.
Summary.
In summary, the post-harvest marketing strategy that has given the most consistent returns is a storage hedge using on-farm storage to capture the basis improvement from harvest until winter. It has consistently given good returns but with additional costs and risks. The downside to this strategy it requires tying up grain storage for six months or longer. Also, the in and out storage costs, insect control, extra drying and aeration, fixed grain bin costs, and additional labor and management can reduce the returns by 20 – 40 cents per bushel. Selling a March futures contact after making a harvest cash sale has given returns of over 40 cents/bushel. However, there is risk in trading futures contracts. ∆
DAVID L. REINBOTT: Agriculture Business Specialist, University of Missouri
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