Agriculture Reference
In-Depth Information
Cash price relationships
At each level in the wheat marketing system, two
prices are normally found (Fig. 23.1). One is the
price for received wheat, and the other is the price
for shipped wheat. The delivery price may be
referred to as the destination or “FOB destina-
tion” price, that is, “free on board” (delivered to)
at destination. Producers delivering to the eleva-
tor receive the farm-level price, or in trade terms,
the destination price.
Elevators selling wheat may sell FOB (origin)
or destination. When buyers schedule and pay
transportation costs, they offer a FOB origin
price. If sellers schedule and pay transportation
costs, they receive a destination price. The differ-
ence in the FOB origin and FOB destination
prices is the cost of transportation.
equipment, quality specifi cations, timing, and the
relationship between the seller and the buyer.
Competition among buyers and competition
among sellers keep profi t margins competitive
with other investments in the economy as a whole.
If wheat is to be sold, it will be sold to the highest
bidder. If wheat is to be bought, it will be bought
from the elevator offering the lowest price.
Since wheat is a storable commodity, and the
futures market offers contracts that may be used
to protect a price while still owning the cash
wheat, sellers may use futures contracts to price
wheat and delay selling the wheat on the cash
market. Futures market contracts provide an
alternative to selling and delivering wheat imme-
diately after buying it. When a merchandiser at a
local elevator buys a producer's wheat, they
compare the bids from several buyers with the
hedge potential on the futures market to deter-
mine whether to sell or hedge the wheat. The
same futures contract price is available to both
sellers and buyers. If a seller or a buyer believes
that cash prices are too high or too low relative to
futures prices (basis is too strong or basis is too
weak), futures contacts provide a temporary alter-
native to immediately participating in the cash
market.
If a level can be identifi ed in the wheat market-
ing system where the cash price is established, it
would be when the end user buys wheat. Both
terminal elevators and end users normally base
bid and ask prices on a futures contract price. The
fi nal price is determined by negotiation. Competi-
tion among sellers and buyers impacts the nego-
tiation process.
Terminal elevators subtract transportation and
handling costs plus a profi t margin to determine
the price offered for wheat. Subterminal elevators
subtract transportation and handling costs plus a
profi t margin to determine the price offered for
wheat. Local elevators subtract transportation
and handling costs plus a profi t margin to deter-
mine the price offered for wheat. Producers eval-
uate transportation costs and elevators' price
offers to determine where they will deliver and
sell wheat.
To determine an offer price, each seller sub-
tracts the transportation costs and all other costs
PHYSICAL FLOW OF WHEAT
Some producers deliver wheat to subterminal or
terminal elevators, or they may deliver directly to
an end user. However, most producer-owned
wheat is delivered to local elevators.
Local elevators mostly sell wheat to subtermi-
nal or terminal elevators, which in turn sell the
wheat to domestic (fl our or feed mills) or foreign
(export) users. Larger local elevators may sell
directly to domestic users but rarely will local
elevators sell to foreign buyers.
There is an increase in producers selling
directly to foreign buyers. Recently, a wheat pro-
ducer in the Oklahoma Panhandle sold a unit
train (10,614 tonnes) of hard white wheat to fl our
mills in Mexico. The producer worked directly
with a multinational grain fi rm to coordinate han-
dling, transportation, and payment.
CASH PRICES
The US wheat marketing system is competitive.
Most sellers choose among several buyers, and
most buyers choose among several sellers. Factors
that determine to whom to sell or from whom to
buy include price, availability of transportation
