FARGO, N.D. - Farmers in the region are in the midst of a nervous mind game, trying to navigate marketing decisions in the midst of a widening drought, a North Dakota State University economist says.
Frayne Olson, a marketing marketing specialist with the NDSU Extension Service, says it is easy to get carried away with the price situation.
"I had a phone call the other day from a farmer who asked, 'When are we going to get to $12 (per bushel) wheat?'" Olson says. "I said, 'Well, I don't know, but it probably won't be this year.'"
The actual price of wheat is only recently nudged through the $8.15 per bushel level that had been a peak about four years ago.
In projecting price outlooks, farmers need to look beyond the local situation and recognize regional and global trends. Significantly, Canadian spring wheat acres are up. Some Saskatchewan and Manitoba farmers are facing some of the dry conditions affecting central and western North Dakota and parts of South Dakota, but others will have a good crop, and world carryover supplies are strong.
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"It's not like we're short of wheat," Olson says.
Old crop choices
One challenge is how to price your "old crop." Many farmers in the region have considerable old-crop wheat from last year's production that hasn't been marketed.
One classic marketing strategy tool is to try to sell into rallies - small increments daily or weekly, to "average up" for the price rallies. If drought is affecting the farmer's ability to produce, the strategy is more challenging.
A second strategy is to wait for the top and sell as prices begin to fall.
"Psychologically, that's a much harder thing to do," Olson says. "You say, 'It's gone down another 20 cents a bushel today - I can't sell now.'"
The top is probably in when combines start to run and the market sees actual yield results or the weather shifts and damage has been mitigated, he says.
A bigger issue is what do you do with the crop that's in the field, Olson says.
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"The challenge with that is, given the high prices, everyone is saying, 'Oh it would be wonderful to be able to market something,'" he says. "The challenge is how many bushels do you want to market?"
The prices go up, but a farmer's projected yields are likely also going down, he says.
"There's this nervous game that we play (involving) when do you pull the trigger and market what you have," Olson says.
2018 pricing
Still another issue is whether to price some of the 2018 crops.
"The expectation is, with the higher prices, it's going to encourage more spring wheat planting; we're going to have more acres. We get into this pendulum of prices and production."
Olson is recommending yes: With average yields, farmers can make that pay. But he urges to go slow and do it small moving into 2018.
As of July 5, 2017, the futures price for September 2018 wheat was $6.77.
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"If you take 70 cents off for basis, you're looking at approximately $6 per bushel wheat for 2018 delivery. That's not that bad. I wouldn't be overly aggressive, but yet, to start booking a few acres or some production, I think, would make some sense."
Rapid increases in price during a weather market also bring outside investors - speculators - into the grain market.
"That tends to drive the prices even higher, which is good from a farmer's standpoint, but the challenge is when do you pull the trigger. Nobody knows that because it depends on when the rains come."
Quick-drawing
Markets tend to over-correct, Olson says.
"They get to prices that are too high before they realize, 'This is where we're at for these conditions,'" he says. "Farmers are in an anxious time of trying to pick the top, and predicting the top is predicting the weather, which is almost impossible."
Randy Martinson, president of Martinson Ag Risk Management, in Fargo, says the spring wheat market has been changing since early May, and "seems to be changing every day" as drought regions expand.
In the Northern Plains, the big changes have been in the futures market.
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"We haven't really seen it in the cash side. We haven't seen the basis widen out on the cash market," Martinson says.
The cash price farmers receive at an elevator for grain is based on the futures market but also on the basis, which is the price of shipping and handling at a particular location.
Martinson says one explanation for the market rise is that end users for wheat are coming into the futures market, securing what they need for next year.
"If there is a shortage they can force delivery into the futures contract," he says.
In winter wheat, farmers are seeing basis levels becoming very favorable for that region. Despite plentiful winter wheat supplies, Martinson says users are demanding their winter wheat needs now and delaying their spring wheat purchases.
"Minneapolis futures markets are looking for a tight ending stocks estimate, and it seems like it continues to get tighter every day," he says.
Price prediction
How high will the price go?
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Marketers typically make their best estimate based on past rallies, Martinson says. The market has blown through "technical levels" that market charters had considered significant - $7.35, $7.65 and now more than $8 per bushel - levels where the market had "stalled out" in past rallies. On July 3, the futures went through the $8.15 per bushel level that had been a high about four years ago.
"That was the line most people were looking at for this market to trade to," Martinson says.
Not all regions will fare the same.
Western North Dakota farmers are facing drought, while parts of northeast North Dakota have seen excess moisture the past two years.
"There's not a lot of wheat up there, but there is some. A lot of them went to later-season crops," Martinson says.
Farmers hit by serious drought will have crop insurance for a safety net.
"It's not intended to replace your income, but it will help," Olson says. "There's always winners and losers in this (drought) game, depending how bad you get hit and the decisions you make as you're going through it."
Farmers need the financial resources from the good times to refinance and get through to brighter days.
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"I know there are some people in a lot of financial stress right now, and are very concerned about what they're going to do," Olson says. "There are no really good choices. The issue is how we minimize the losses."
