I remember watching a movie some years ago about mountain men. During the show, there were two men talking about how March was known as the muddy month to those down in the valley. Well, for the most part, it has been a while since we could say that; however, this winter has been good for us receiving rain and snow. I have visited with producers that are optimistic about the amount of topsoil and subsoil moisture on their farms. It is always good to feel encouraged at this time of the year.
It is always good to be optimistic about something – just for the fact there will always be something coming along that is possibly unforeseen and will try to kick us right in the teeth. For the most part, none of us have any control over what is going to happen. For example, the weather will always be too hot, too cold, too wet or too dry, and through all of this, you continue to do the best you can. You also have disease challenges; then let’s throw in challenges with insects. I don’t want to sound all doom and gloom, but the point I am trying to make is that producers are very resilient.
It really doesn’t matter what Mother Nature throws at you, you adjust and continue to fight. Yes, I did say fight because we all know that growing a crop isn’t a vacation by any stretch of the imagination. When it comes to producing, you read just about everything you can get your hands on, you talk to agronomists, you attend meetings where you hear about different classes of commodities as well as different varieties, and yes, you talk to your neighbors. When it is all said and done, you make a decision on what will produce best on your soil with your water.
When it comes to producing commodities, there is one thing we all know for sure – it isn’t “one-size-fits-all.” This is true in production as well as marketing. What works for the people in Chicago and your neighbor may not be in your best interest and may not work for you. Marketing should be an individual decision based on what you know and how you feel. There are basically two components that make up the cash price that you contract your commodities: they are futures and basis.
There are far too many producers that will follow the futures, but they don’t spend much time studying the local basis. When it comes right down to it, it’s exciting to talk about what is going on in Southeast Asia, Australia, South America, and let’s not forget the Black Sea region. Now don’t get me wrong, it’s important for us to know what is taking place in the world and see just what the U.S. is doing in the export market.
However, it may be just as important to you to know what is going on locally, and the basis is your best indication of the local market. When the cash bid increases due to a strengthening in the basis, you just may need to get serious about contracting some bushels. The buyer at this time needs wheat and as soon as they have filled their need, they will move the basis back lower. So the question is: Just how often does this happen? And the answer is: more often than not.
We are now at a time when producers will be watching the bids for new crop. Let’s use soft white for our example. In southeast Idaho, the difference in basis between nearby delivery and August/September is an inverse of $1.50 per bushel. This means new-crop basis is $1.50 less than the nearby bid. Knowing this, what could you do in your marketing strategy? There are two simple strategies: First, you could sell a futures contract in your own personal futures trading account, or you could enter into a hedge-to-arrive contract with a local buyer.
Both of these strategies have an upside as well as a downside – after all, nothing is perfect. We will discuss these strategies in more detail in the months ahead. For now, “be safe.”
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