Can you believe it’s already May – the beginning of the BBQ season when the demand for hamburger and hot dog buns increases? We don’t usually see the demand for wheat increase, however, as the flour mills for the most part have already contracted their needs for the summer months.
With the futures markets trading at high levels through February and March, we did see a fair amount of local wheat contracts for August through December delivery. Having said that, most producers were fairly conservative with their contracting, still remembering what happened this past year. Producers who normally felt good about forward contracting up to half of their projected production were happy contracting between 20% and 30% this year.
Producers were also looking at the basis for new crop. Since the current basis looked to be a little weak, they contracted their wheat using hedge-to-arrive contracts as well as selling wheat futures using their personal futures trading accounts. Then they would be able to set the basis at a later time frame, usually after harvest when the basis begins to strengthen.
When we look at the historical trends in the wheat market, we see there is a little strength the first half of May, but then the futures trend lower into the Fourth of July. I know this year could be different just based on the volatility, but it is still good to watch the trends to see if they are following the historical charts. In making your marketing plan and decisions, it will always be good to include both the historical futures trends as well as the historical basis trends.
This year, it looks as though the challenges will be centered on overall production. We are seeing crops being stressed due to the lack of water. There isn’t much we can do about that unless we get help from Mother Nature. In most areas, we are experiencing a reduction in yields, which in reality doesn’t help anyone. Yes, we are seeing higher prices for our commodities, but higher prices usually won’t make up for a reduction in yield.
In a year like this, it becomes very difficult to remain calm and not get emotional in your marketing plan. I realize we need to do the best we can when contracting your commodities; however, when the market gives you 75 cents more today than it did yesterday for your wheat, the question shouldn’t be “How much higher do I think the market will move?” but rather “How many bushels should I contract?” A few bushels here and a few bushels there will give you the opportunity to finish the marketing year with a good average for your crop.
I know I talk a lot about the basis for wheat, but let’s remember that most commodities will trade a basis. I had a producer tell me they watch the basis on diesel fuel. Early in the year, he saw the local basis on fuel was lower than he had seen for quite some time, so he filled the tank on the farm. He indicated the basis may not be the only indicator he looks at with his diesel, but it is one part of his decision-making process. If you use the basis on fuel as an indicator, over the past three years we have seen low basis between Christmas and the middle of January. We also see a weakness in the basis between the middle of June and the Fourth of July. However, the June time frame hasn’t been as weak as it is in January.
Overall, this will be a year where we are given the opportunity to learn new marketing lessons as well as remembering just what you have learned in the past.
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