Carry on, wayward wheat market? What the “full carry” condition means for wheat marketing


US wheat farmers have seen dramatic price declines for all classes of wheat, but hard red winter wheat has been particularly hard hit. Futures prices for nearby delivery have fallen from around $8 per bushel in May 2014 to around $4 per bushel today. Cash prices in Great Falls for hard red winter wheat with 11 percent protein were between 3.38 and 3.51 per bushel on August 3.

Why are winter wheat prices so low? The world is awash in wheat. Plentiful inventories held over from previous crops combined with a big 2016 harvest, particularly in Kansas, the largest hard red winter wheat producing state. When wheat is broadly abundant, we see low prices here in Montana.

What is the market telling us about the future?

In these conditions, should farmers should sell grain today or wait for better prices in the future? How long will low prices persist? Wheat futures market provide some answers by establishing prices not only for delivery today, but also for dates far out in the future. For example, the Chicago Mercantile Exchange trades Hard Red Winter wheat futures contracts for delivery in September 2016, September 2017, and September 2018.

The “carry” or the carrying charge is the difference or “spread” between prices for delivery on different dates. The carry between the September 2017 price and the nearer-to-delivery September 2016 price represents the return that could be earned by taking wheat today, placing it in storage, and “carrying” it through time until selling it in September 2017.

So what does the carry look like for hard red winter wheat? The Sep 2016 contract closed on August 3 at $4.12/bu while the September 2017 contract closed at $4.91/bu. The carry is therefore 4.91-4.12 or $0.79/bu. The market provides a signal, though the carry, that you can sell for delivery now for $4.12, or sell for delivery a year from now for $4.91. When the carry is large and positive like this, the market is saying that wheat is plentiful today and it may be better to store.

How big can the carry get?

A condition referred to as “full carry” occurs when spreads reach a maximum amount limited by arbitrage. The full carrying charge equals the interest cost associated with holding grain (and not receiving payment at its current value) plus the physical costs of placing grain in storage. If the carry exceeds this level, traders could buy the nearby, incur the carrying charge, sell in the future, and earn riskless arbitrage profits.

We can calculate the full carrying charge for Hard Red Winter Wheat futures as follows:

Full carry (per month) = current price × annualized interest rate ÷ 12 + monthly commercial storage cost 

For hard red winter wheat, the current futures price is $4.12/bu, and commercial storage rates are set by the exchange at $0.09/month from July to November and $0.06/month from December to June. Assuming a 2.5% interest rate, the full carrying charge of $0.97/bushel from now until September 2017. Thus the current carry is 81% of full carry. Historically, a carrying charge above 80% of the theoretical full carry level has been considered a signal that the returns to storing grain are high and unlikely to get higher, i.e. that the full carry maximum is binding.

Spreads approaching full carry are a negative for farmers looking for relief from low wheat prices. The market expects wheat to remain plentiful at least until next fall. It will pay near the maximum amount to encourage holding grain off the market until next fall. The only reliable indicator that the glut is being cleared and wheat prices might rally is for spreads to fall below full carry.

(Photo by Lars Plougmann is licensed under CC BY 4.0)

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About Author

Joseph Janzen

Joseph Janzen is an assistant professor in the Department of Agricultural Economics and Economics at Montana State University. His research addresses price and trading dynamics in agricultural commodity markets. Some of his recent projects include commodity price shock identification, commodity futures market microstructure and the location of price discovery in world wheat markets, and the influence of international food aid procurement in pulse crop markets. Joe received his Ph.D. in Agricultural and Resource Economics from the University of California, Davis in 2013. He also holds M.Sc. and B.Sc. degrees in Agribusiness and Agricultural Economics from the University of Manitoba. Prior to his doctoral studies, he farmed with his father and brother, growing wheat, canola, oats, and soybeans at St Francois Xavier, Manitoba, Canada.

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