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Storing wheat riskier than selling it, economist says

Washington State University small grains economist Randy Fortenbery recommends farmers buy call options on the wheat futures market. With little room for higher prices, that’s a speculative venture, but less risky than holding cash inventory, he told farmers at the Tri-State Grain Convention.
Matthew Weaver

Capital Press

Published on November 16, 2017 8:29AM

Washington State University small grains economist Randy Fortenbery answers a question during the Tri-State Grain Growers Convention in Spokane.

Matthew Weaver/Capital Press

Washington State University small grains economist Randy Fortenbery answers a question during the Tri-State Grain Growers Convention in Spokane.

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SPOKANE — Wheat prices won’t rise enough in the near future to make storing grain a safe bet, a university economist says.

Cash prices are increasing slightly, but not enough to cover storage costs, Randy Fortenbery, small grains economist at Washington State University, told the Tri-State Grain Growers Convention.

Patience in pricing next year’s wheat crop is less risky than storing the last harvest, he said.

He told farmers he doesn’t see much room for higher market prices over the next few months, unless led by a rally in the futures market.

“What we need is a big rally, $1.10 or $1.20, to cover storage costs going forward,” he said.

Options in the futures market are cheap due to low volatility, Fortenbery said, about the same as the cost of storing wheat.

Fortenbery cautioned farmers that it’s a “purely speculative venture.”

“You’re probably going to lose,” he said. “But you’ll lose less than if you’re holding cash inventory. You’re probably going to lose on that as well, and you’re not just going to lose the storage costs. If prices continue that downtrend we’ve seen over the last several months ... you’ll lose money in the value of the inventory as well as the cost of holding onto it.”

Instead of storing inventory and hoping prices increase, Fortenbery recommends farmers buy call options, which he said he “almost never” does. Someone who buys a call option will make money if the futures price rises above the strike price of the call plus the premium and the cost of the transaction.

Holding physical inventory is expensive, Fortenbery said, and maximizes the risk when speculating on future wheat prices.

Fortenbery said prices have remained within a 40-cent range, of $4.40 to $4.80 per bushel, so downside risk appears to be limited. Hard red winter wheat exports have increased, which is positive, but the market anticipated that and didn’t respond, he said.

Prices are driven by the global market. Consumption has been below production for the last five years, so inventories have been growing globally.

“This is confusing people because we have declining wheat acres significantly ... yet we have the second-lowest price that we’ve had in a decade,” Fortenbery said.

The decline is happening nationwide. Washington and Oregon were unchanged from last year, while Idaho reduced by 10,000 acres, Fortenbery said.


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