Wheat risk management on hold


Higher prices possible as weather becomes an issue

Producers haven’t hedged most of this year’s wheat and durum crop, but analysts and market advisers aren’t too worried.


They think wheat prices are likely to rise in coming months, and farmers who wanted to hedge have probably already done so.


“We’re holding off on any new crop contracting, but we’ve got our clients where we need them to be,” said Derek Squair of Agri-Trend Marketing.


“We feel things are pretty volatile now, especially on the quality side, and the basis is still pretty wide.”


The wheat contracting system in Western Canada is still primitive, with most grain elevator contracts apparently directly connected to individual commercial sales.


If a company makes a sale, it will offer farmers contract prices to get the required amount, quality and protein levels, but it will not want to take any more.


Companies will also reduce prices to discourage unwanted deliveries.


“If they get any sort of volume, their price will drop by 50 cents over night,” said Squair.


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“It’s not very liquid, and once they’re full they don’t want any more.”


These contracts are priced relative to the price on the day when the company made the sale to the end user. That contract price might vary little over a number of days despite the daily variations of the futures market.


Brenda Tjaden Lepp of FarmLink Marketing Solutions has noticed the same phenomenon.


“On any given day, (grain companies are) either in the market or not in the market, depending on their position,” said Tjaden Lepp.


“All this stuff is going to change every day.”


That means farmers need to monitor elevator bids daily if they are thinking of selling. Prices can rise or fall quickly and don’t necessarily match the futures price.


Charlie Pearson of Alberta Agriculture said most grain companies are offering contracts for specified grades and protein levels of wheat, but farmers can also try to negotiate prices for what they are most likely to produce.


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“There may be a bit of room for negotiation,” said Pearson.


“It may not be the official specification, but at least some companies might look at some contracts for a different grade than their posted one.”


Tjaden Lepp said she has backed off selling wheat because most of her clients sold about 25 percent during the winter at higher prices. As well, there is substantial production risk now and there is a good chance of a rally this summer.


“We’ve been keeping back another bullet ahead of harvest in case we get a rally,” she said.


Squair said his company had earlier recommended using put options if farmers wanted to move higher than 25 percent sold, which was attractive when prices were higher during the winter. At the time, prices were offering a net margin of $70 per acre, so farmers could buy a put option equivalent to about $10 per acre that would protect them from a slide in prices but wouldn’t expose them to production risk.


“Let’s spend $10 of that today on a put option and protect $60 of net margin and go to 50 percent sold,” Squair said about his winter recommendations.


Tjaden Lepp and Squair are now recommending that farmers wait and see. Weather worries in Kansas and Russia are providing reason to be mildly bullish.

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