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Every year, landlord Dwan Jantz comes to her field
near Wilbur when the grain is being harvested.

Photo by William Bell




Use data to drive marketing decisions

March 2021
By Trista Crossley

Successfully growing and then harvesting a wheat crop is only part of growers’ battle to make a living. They also need to know how to get the best price for their grain. Dr. Randy Fortenbery, an economist from Washington State University, provided some strategic commodity marketing tips during a webinar last month.

More than 85 growers joined Fortenbery’s Zoom presentation, which was part of the Agricultural Marketing and Management Organization’s (AMMO) 2021 winter schedule. He began his presentation by telling growers that the objective of marketing is to earn a reasonable return on investment while minimizing the risk associated with achieving a target level of income.

“Often, producers are much more risk seeking when prices are high. They don’t lock those prices in because they think they could go even higher. And they are more risk adverse, meaning they don’t want to take on risk, when prices are quite low, meaning they are willing to lock in prices that are sort of at the bottom end of their historical price experience. That’s backwards, from my perspective, of the way we really want to think about this,” he said.

Fortenbery zeroed in on several important, “benchmark” pieces of information that he recommended growers track and use to evaluate price risk at any moment in time:

• Supply and demand numbers that predict where the wheat crop is going to go in the current marketing year. This comes from the World Supply and Demand Estimates (WASDE), a monthly report published by the U.S. Department of Agriculture.

• The relationship between different commodities, such as wheat and corn.

• International markets. Approximately 45 percent of all U.S. wheat goes overseas, so what’s happening in other countries, like exchange rates, income growth and competitors’ production and export levels, can have a huge impact on U.S. growers’ price going forward.

Using 12 years of July soft red wheat future prices to illustrate his point, Fortenbery said you don’t see a consistent pattern, and in fact, prices tend to stay flat through the year. He added that the futures market is pretty efficient in predicting where prices are going to be when a contract expires. Washington wheat prices generally follow this same trend.

“If I routinely decide to hold grain after Sept. 1 just hoping the price will go up, many years, I am going to be disappointed because that doesn’t happen all the time,” he said. “In fact, many times it doesn’t happen, and we want to be able to make a more informed storage decision in each year and think carefully about what the real price risk is if I hold grain off the market moving forward.”

Supply and demand data
Fortenbery said he cares about three things on the WASDE: export total; feed and residual demand; and the world carryout number.

To use the export number, Fortenbery takes the Foreign Agricultural Service’s weekly export sales report and uses it to calculate if the U.S. is on track to meet the WASDE export total. He takes the total export number, divides it by 52 and charts both numbers (see Slide 1 on page 38). He said he wants to see the weekly sales number between 91 percent and 93 percent of the export estimate.

“If the weekly exports are lagging the amount of wheat we need to export each week to hit that target, price risk is being elevated, and we probably want to be careful about storing wheat much further into the marketing year. We might also be thinking more carefully about pricing next year’s wheat because we might expect prices to react negatively in disappointment in the export market,” he explained. “On the other hand, if those weekly exports exceed what we need to export each week to hit that annual forecast, that’s a price positive situation. Price risk is minimal, and we might be rewarded for delaying pricing, either continuing to store wheat from last year or not pricing next year’s wheat until we figure out exactly how much we are going to export.”

Fortenbery cautioned that the export number’s influence on wheat prices isn’t a guarantee, because something else within the balance sheet could also affect prices.

Wheat as a feed grain
Fortenbery explained that wheat prices are closely aligned to corn prices. In general, when corn prices change by 1 percent, wheat sees a corresponding change of about .45 percent. At very high corn prices, more wheat tends to go into feed rations, which increases the demand for wheat. In addition, wheat and corn compete for acres, especially in the western Corn Belt.

Carryout of world wheat
As this number tends to go up, Fortenbery said it generally puts a limit on how far any individual country’s price can go. The more world ending stocks, the larger the world’s cushion that can be used to offset production concerns in individual countries.

Fortenbery said another way to look at world carryout stocks is how much it represents in number of days of demand. He said when it gets around 90 days, markets are much more sensitive to production problems than when there’s really high supplies.

“The bigger the cushion, the less responsive prices will be to any kind of a production disruption,” he said.

How the market interprets this information is generally reflected in the futures market.

“The futures market for wheat is telling us what traders think a fair price would be today for delivery later, and as the information set changes tomorrow, that price is going to change,” Fortenbery said. “We expect that later prices should be higher than prices for today. If I want farmers to store wheat, I need to offer them more money later, because it’s going to cost them something to store wheat, than I’m offering them today.”

Fortenbery’s rules of thumb for the futures market are:

• To delay pricing, he wants to see a carry in the futures market. In other words, he wants to see a price for later delivery be higher than the price for current delivery.

• A strong storage signal is a carry of $.05 per bushel per month.

• It is important to “localize” the national storage return by figuring out what a grower’s basis is. Basis is the difference between a grower’s price and the futures price. Generally, for white wheat, the basis is calculated by taking the cash price and subtracting the futures price of soft red winter wheat of the contract that is closest to maturity but not the maturing month’s contract.

Fortenbery said if the cash price is low relative to futures, that’s a weak basis. A weak basis is good for cash buyers but bad for cash sellers. On the other hand, a high cash price relative to futures is a strong basis, and a strong basis is good for cash sellers but bad for cash buyers. He advised growers to learn to monitor basis on a weekly or monthly level, record it and calculate a multiyear average. Growers can then use that information to help evaluate a storage decision (see Slide 2).

Finally, Fortenbery touched on farm program choice—Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC) programs. He believes that for 2021, there will likely be a PLC payment for wheat, based on USDA’s current marketing year average price, despite nice storage returns since September and wheat prices that are higher than they have been for the past few years.

“This is kind of a best case scenario this particular year. Storage paid. We have nice prices in February, much better than in the past few years. We have better prices for next year’s crop if we start forward pricing, and we still will receive a PLC payment,” he said.

To watch a video of the webinar, go to our YouTube channel.