Rajiv
04-11-08, 04:03 PM
The stench of fear in the wheat industry (http://southwestfarmpress.com/grains/wheat-prices-0410/)
At this writing, some Oklahoma and Texas elevators are offering to forward contract wheat for a minus 75 cents basis the Kansas City Board of Trade July wheat futures contract price. The KCBT July wheat contract price is $11.40, and wheat may be forward contracted for $10.65.
With wheat prices above $10, you would expect producers and elevator managers to be feeling good about the wheat market. What I have observed is that many are scared, worried or some other adjective that means, “They just do not know what to expect, and what happens may not be good.”
Fear comes from the fact that Oklahoma producers have had three below-average crops in a row and two total disasters. Texas producers have experienced two disasters out of the last three crops and are facing a potential disaster this year. Three out of the last four Kansas wheat crops have been below average and two were disasters.
Crop insurance and disaster payments may cover part of producers’ lost income. Elevators, however, have no government help. They depend on wheat bushels (volume) to make money and the bushels have not been there.
Producers are experiencing high prices for both inputs and wheat. It costs at least twice as much per acre to produce wheat compared to two years ago. Producers must borrow more operating capital or invest more savings to produce a crop and if something happens to the crop, their savings and equity disappear relatively fast.
Elevators and farm supply stores must borrow more to buy higher priced inputs for producers to use. This necessity adds risk and drives up operating expenses. Inputs on the shelf or in the warehouse tie up operating capital, and interest must be paid on the unpaid loans.
Producers are concerned about the high prices. Given the experience of the last three or four years, producers are afraid to forward contract or hedge too much production.
At this writing, some Oklahoma and Texas elevators are offering to forward contract wheat for a minus 75 cents basis the Kansas City Board of Trade July wheat futures contract price. The KCBT July wheat contract price is $11.40, and wheat may be forward contracted for $10.65.
With wheat prices above $10, you would expect producers and elevator managers to be feeling good about the wheat market. What I have observed is that many are scared, worried or some other adjective that means, “They just do not know what to expect, and what happens may not be good.”
Fear comes from the fact that Oklahoma producers have had three below-average crops in a row and two total disasters. Texas producers have experienced two disasters out of the last three crops and are facing a potential disaster this year. Three out of the last four Kansas wheat crops have been below average and two were disasters.
Crop insurance and disaster payments may cover part of producers’ lost income. Elevators, however, have no government help. They depend on wheat bushels (volume) to make money and the bushels have not been there.
Producers are experiencing high prices for both inputs and wheat. It costs at least twice as much per acre to produce wheat compared to two years ago. Producers must borrow more operating capital or invest more savings to produce a crop and if something happens to the crop, their savings and equity disappear relatively fast.
Elevators and farm supply stores must borrow more to buy higher priced inputs for producers to use. This necessity adds risk and drives up operating expenses. Inputs on the shelf or in the warehouse tie up operating capital, and interest must be paid on the unpaid loans.
Producers are concerned about the high prices. Given the experience of the last three or four years, producers are afraid to forward contract or hedge too much production.