Tuesday, December 08, 2009
Wheat! Why Is It Such A Problem To Sell Profitably?
Whether you are a Great Plains wheat grower, or a Cornbelt corn and bean farmer, the wheat market always has significance because of its global interest. Its worldly demand as both a human food and a livestock feed make it the primary traded grain commodity, and that means a spillover impact on corn that trickles down to soybean acres as well. But recently, the wheat market has been difficult to understand, particularly the US cash market and its relationship to the futures market. We’ll assemble a special edition today dedicated to the wheat market.For the past several years the expiration of wheat futures contracts have failed to converge with the cash market, a problem recently solved for corn and soybeans, but which remains unsolved for wheat. In his weekly newsletter, University of Illinois marketing specialist Darrel Good says a consensus has not been reached on the reason for the wide basis problem. However, he says the Chicago Board of Trade will institute a variable storage rate for wheat futures beginning with the new crop delivery contract as its latest attempt to resolve the discrepancy. He adds, “Wheat futures prices at the Chicago Board of Trade appear to reflect a “world” price of wheat without any class distinction.” But he says the delivery specifications essentially make the contract one for soft red winter wheat and the weak basis for SRW may continue until its fundamentals become more aligned with the world wheat market.
Good and other economists at the University of Illinois spent more than ten years monitoring markets for wheat and other grains and oilseeds and how they were analyzed by commercial advisory services. Those advisory service recommendations for wheat marketing were part of the AgMAS program. Although the program has been concluded, reports are still being issued on the performance of the various services. One of three reports issued this week looks at “The Pricing Performance of Market Advisory Services in Wheat Over 1995-2004.” Their efforts were designed to help a broad spectrum of wheat growers, from southwestern Illinois SRW producers to southwestern Kansas HRW producers. Since 82% of large scale farmers in Midwest and Great Plains hired marketing advisory services, only 11% of those subscribers precisely followed the advice they paid for. 35 different advisory services were monitored from 1995 to 2004 to determine how they performed compared to common practices that farmers could implement. Several came and went during that time, others merged, and some stopped giving consistent recommendations.
The AgMAS economists reported, “The advisory program prices in corn and soybeans tended to fall in the middle of the price range, over time, similar to the performance in wheat. However, the proportion of programs beating the various benchmarks was lower in wheat than in corn and soybeans. Additionally, in corn and soybeans, advisory program prices, on average, were higher than the benchmarks. In wheat, this is not the case, only advisory program prices in hard red winter wheat were higher than the 24-month market benchmark.” And they add, “Results indicate that market advisory services as a group do not outperform the markets, or even farmers. In fact, the average harvest price has tended to be much higher than the average advisory service prices and other benchmarks, including the farmer benchmark.”
Reflecting on Darrel Good’s newsletter comment that the CBOT wheat futures contract had assumed the personality of the SRW market, the AgMAS economists analyzed how the advisory services performed in both the HRW market and the SRW market. Joining Good in the analysis were Scott Irwin, Ryan Batts, and Tracy Brandenberger.
Hard Red Winter Wheat
Their report on advisory service performance in the HRW market also looked at the period from 1995 to 2004, with an emphasis on LDP and marketing loan gain for the various advisory services and created a marketing profile that indicates the cumulative net amount of grain priced during the two year marketing season. Interestingly, the average amount sold, which gradually increases throughout the two year period reaches the one-third sold on the first day of harvest.
Soft Red Winter Wheat
The AgMAS economists also produced a similar analysis for the SRW market, looking at the performance of various advisory services and how they incorporated loan deficiency payments and market loan gains into their recommendations for the SRW market. Also included was an analysis of how and when the advisory services priced grain during the two year extent of the marketing season. As in the report on HRW marketing, the services reach the point of one-third sold on the first day of harvest.
Summary:
In recent years the wheat market has been challenged in the effort for cash and futures prices to converge at the time of contract expiration. The CBOT has made a number of changes in the wheat contract and is planning more for the new crop. But wheat growers have found that even commodity trading advisors have been challenged over time in making profitable marketing recommendations for wheat. The seven year AgMAS study found the professionals were not much better than the farmers who hired their expertise. A recent re-evaluation of the study looked at how the advisory services were managing their cumulative recommendations. It found that pre-harvest sales were no more than one-third for both soft and hard red winter wheat.
Posted by Stu Ellis on 12/08 at 01:30 AM | Permalink