Non-Convergence of CME Hard Red Winter Wheat Futures and the Impact of Excessive Grain Inventories in Kansas

Transcription

1 Non-Convergence of CME Hard Red Winter Wheat Futures and the Impact of Excessive Grain Inventories in Kansas Daniel O Brien, Extension Agricultural Economist Kansas State University August 10, 2016 Summary The current wide wheat basis situation that exists in the Kansas wheat market has resulted mainly from large, plentiful inventories of available wheat in combination with other grains in Kansas grain elevators. These large inventories of grain have led to increased demand for storage space in Kansas grain elevators including those at approved delivery locations for wheat futures contracts. Because of this increased demand for grain storage space, the true value or price of physical grain storage at delivery locations has risen above the storage costs written into the CME Kansas hard red winter wheat contract. This difference is called a wedge, with a positive wedge occurring when the true value or price of physical grain storage is greater than the futures contract storage rate on delivered grains at delivery location grain elevators. When short position holders of CME Kansas hard red winter wheat futures contracts make delivery on their futures contract positions in the form of warehouse receipts, they force long futures position holders to take delivery of those same warehouse receipts. Then because of the positive wedge that currently exists between the true price of physical storage space and the storage costs in the CME Kansas hard red winter wheat futures contract, these long position holders have an incentive to hold and store these warehouse receipts that they have taken delivery of indefinitely rather than to load out and convert them to grain in the cash market. Long position holders have a financial incentive to continue to accumulate and store warehouse receipts they have taken delivery of as long as a positive wedge exists at delivery location elevators contributing to wider wheat basis levels and increasing non-convergence of Kansas wheat cash and futures prices over time beyond the specific delivery elevator locations. Possible solutions to the formation of such positive wedges between the true value or price of physical storage and lower contractual storage rates and the occurrence of non-convergence of cash and futures prices in Kansas hard red winter wheat markets would be to either raise the contractual storage rates to a level as high as physical costs of storage have even been or are likely to be, or to establish a variable storage rate (VSR) mechanism for the CME Kansas hard red winter wheat futures contract as exists for the CME Chicago wheat futures contract. The solution of raising the fixed storage rate on delivered grain that currently exists in the CME on the Kansas HRW wheat futures contract would help to solve the problem of non-convergence between cash wheat prices and wheat futures at delivery point location elevators and the broader Kansas wheat market. Low interest costs are another factor leading to non-convergence of Kansas wheat cash and futures prices. Low interest expenses reduce the economic total opportunity cost to long position holders how have been delivered on of holding warehouse receipts rather than loading out, stopping interest costs, and generating revenue in the cash grain market. If these periodic times of non-convergence in the Kansas wheat market were eliminated or reduced in frequency of occurrence and degree of price impact, it would benefit Kansas farmers in terms of more effective and efficient crop revenue insurance programs and wheat marketing strategies. It would also help Kansas 1 P age

2 farmers and agribusinesses make more accurate and profitable decisions in regards to crop enterprise selection and profit maximizing decisions in regards to use of farm assets. This topic will be discussed at the 2016 Risk and Profit Conference, to be held August in Manhattan, Kansas ( The Wheat Market Situation It was no surprise to the Kansas wheat industry that cash and futures prices did not converge during the delivery period at designated delivery location grain elevators in early July for the JULY 2016 Kansas hard red winter wheat futures contract. It also has not been surprising that local cash basis levels for Kansas wheat have continued to weaken during July and early August. This is because a) large amounts of 2016 crop wheat have been delivered to Kansas grain elevators during and immediately following wheat harvest, b) U.S. hard red winter wheat exports are moving at a moderate-to-slow pace, and c) ample supplies of low priced feed grains are available to compete with wheat for livestock feeding opportunities. Prospects appear limited for aggressively moving relatively large amounts of wheat out of Kansas elevators to users in the next few months ahead of what is anticipated to be large 2016 fall crop harvests of corn, grain sorghum, soybeans and other crops. A glut of Kansas grain is anticipated for the 2016 fall crop harvest following the large 2016 hard red winter wheat harvest which is likely to further clog the Kansas grain elevator storage and handling systems. To manage this grain storage and handling problem, increases in both permanent and temporary on-farm grain storage in Kansas are anticipated, with a significant amount of fall crops likely to be kept in flat storage or dumped in piles on the ground. The Response of Wheat Futures, Cash Prices, and Basis Wheat prices in Kansas have declined sharply in response to this wheat market supply-demand situation. On July 1, 2016 early in the delivery period for the Chicago Mercantile Exchange (CME) JULY 2016 Kansas hard red winter (HRW) wheat contract JULY 2016 HRW wheat closed at $3.94 per bushel, down from $4.61 on 5/2/2016 (the closing price on the early delivery date for the MAY 2016 HRW wheat futures contract), and from the range of $4.38 to $5.76 the closing prices for during early delivery periods for the MARCH 2015 through MAY 2016 KS HRW wheat contracts (Figures 1a and 1b). Cash wheat prices at designated delivery locations for CME Kansas HRW wheat futures contracts also closed lower, with cash prices for wheat truck bids in Kansas City, Missouri at $3.66 per bushel ($0.28 under basis) on July 1, On August 8 th, cash basis levels had declined further to $0.58 under against the SEPTEMBER 2016 CME KS HRW wheat futures contract (Figures 1a and 1b). Hutchinson, Kansas, is another designation delivery location for KS HRW wheat futures contracts. On July 1, 2016, the high end cash price of the trading range at terminal elevators closed at $3.39 ($0.56 per bushel under JULY 2016 futures). By August 8 th, wheat cash basis levels had fallen to $0.80 under SEPT 2016 CME KS HRW wheat futures (Figures 2a and 2b). At alternative HRW wheat futures delivery locations in Wichita (Figures 3a and 3b) and in Salina, Kansas (Figures 4a and 4b) wheat basis levels were both $0.68 under on the JULY 2016 futures early delivery date of July 1, 2016, and by August 8 th had both fallen to $0.85 under the SEPT 2016 CME KS HRW wheat futures. 2 P age

3 These cash basis levels for the JULY 2016 KS HRW wheat contract are much wider than the location price differentials formally designated to occur in the CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or par at Kansas City, Missouri truck bid locations. Why are Futures & Cash Wheat Prices Not Converging at Delivery? (i.e., Non-Convergence) If it is true that a) cash prices for wheat presently held at various Kansas locations represent the true competitive market value for the crop, and b) that wheat futures contract prices are designed and intended to physically converge with cash prices during the delivery period then why did CME JULY Kansas hard red winter wheat futures and cash prices not converge at delivery elevator locations during the early July contract delivery period? Non-convergence of cash and futures prices seems to be occurring as a result of the large accumulation of wheat and other grain stocks (i.e., inventories). This increase in inventories has caused the true value or price of physical grain storage space to be greater for grain delivered on CME Kansas hard red winter wheat futures contracts than the storage costs to be charged on delivered wheat in the futures contract specifications. See Figures 7, 8, and 9 showing trends in Kansas grain stocks and storage over time and especially the large amount of off-farm commercial combined stocks of corn, grain sorghum, wheat and soybeans relative to upright and flat storage in Kansas grain elevators in Figure 9 illustrates the tight supply-demand conditions for grain storage that currently exists in Kansas, and that are likely to become even tighter in the coming year. Agricultural economists Michael Adjemian USDA, Philip Garcia Illinois, Scott Irwin Illinois, and Aaron Smith UC-Davis (USDA publication, 2013) address the issue of how a high value or price of physical storage space relative to futures contract storage rates on delivered grain can impact grain market convergence in Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies, USDA ERS Bulletin # 115, August In the delivery process for CME Kansas hard red winter wheat futures, when someone with a short futures position delivers on their futures contract in such a large supply-low price market situation as exists in 2016, the long position holder who has been delivered on then possesses a paper certificate or warehouse receipt for those 5,000 bushels (1 wheat futures contract). The long position holder can then either choose to "load out" the warehouse receipt by selling the grain in the cash market, or to hold the warehouse receipt and pay predetermined storage costs on the 5,000 bushel warehouse receipt. If they choose to hold the warehouse receipt without selling in the cash market, long position holders with delivered grain have determined that the returns for holding the warehouse receipt over required futures contract storage costs are positive, i.e., that the futures contract storage costs have understated the true price or value of physical grain storage space. Therefore, they choose not to load out or sell the grain in the cash market limiting the transactional actions that would bring about convergence of wheat cash and futures prices at these designated delivery elevator locations, and by implication in the broader Kansas hard red winter wheat market area. The subsequent cost of storage for these warehouse receipts are written into the CME KS HRW wheat futures contract specifications at 296 /bu/day or approximately $0.09 /bu/month for the July 1 - November 30 period, and 197 /bu/day or approximately $0.06 bu/month for December 1 - June 30 period. 3 P age

4 Why Be Concerned About Non-Convergence in Kansas HRW Wheat Markets? To the degree that HRW wheat futures don t converge to cash market prices then such things as crop revenue insurance coverage, the effectiveness of futures hedges by farmers and grain elevators, and the broader U.S. farm income safety net are impacted. My colleague Art Barnaby Kansas State University Agricultural Economist intends to address this issue more fully and completely in coming weeks. It is our position that the true market price of wheat in Kansas is represented by the cash market especially in light of the nonconvergence issues presently occurring with the CME Kansas hard red winter wheat contract. How Contract Delivery Mechanisms, Storage Costs, and Wedges are Involved The situation that has arisen in 2016 in Kansas is that tightness in the supply of commercial grain storage relative to storage demand in the state has resulted from the large 2016 wheat harvest, relatively slow rates of wheat usage (especially exports), and anticipated harvests of sizable corn, grain sorghum, soybeans, and other crops arriving in fall This oversupply of grain has caused at least a temporary increase in the opportunity cost or true value of physical grain storage space in Kansas. Because of the increased demand for facilities to store grain in, the true value or price physical grain storage is now greater than the storage costs formally written into the CME Kansas hard red winter wheat contract i.e., nearly $0.09 per bushel per month for the July- November period, and nearly $0.06 per bushel per month for December-June. It should be noted that the storage costs written into the CME Kansas hard red winter wheat contract are higher than what Kansas farmers typically pay at grain elevators in various parts of the state which is reported to be $0.04-$0.05 per bushel at this time. Over the last few years $0.04 per bushel was the common storage rate paid to store grain in commercial (off farm) grain elevators in Kansas. However, there are reports in 2016 that at some grain elevator locations commercial storage rates have increased to $0.04 ½ to $0.05 per month. The rate of approximately $0.09 per bushel per month for July-November and $0.06 per bushel per month for December- June applies only to wheat that has been delivered on CME Kansas hard red winter wheat futures contracts at approved delivery location facilities, and not in other grain elevators in the state or even on other wheat that has not been delivered on wheat futures contracts at the selected delivery elevator locations in Wichita, Hutchinson, Salina/Abilene, and Kansas City, Missouri. The situation that currently exists at these designated delivery location elevators for CME hard red winter wheat futures is that the true value or price of physical storage space is markedly higher than the storage costs for warehouse receipts that is written into CME Kansas hard red winter wheat futures contract specifications. When the true value or price of physical grain storage space is larger than the CME HRW winter wheat contract storage rate, the holder of the warehouse receipt certificate has a financial incentive NOT to load out the warehouse receipt and sell the grain in the cash market, but rather to hold the warehouse receipt for later sale. The key point is that the warehouse receipt holder is paying less than the true value of price of physical storage by paying the storage rate written into the CME KS HRW wheat futures contract. Consequently, they have an incentive to hold the wheat warehouse receipt and pay storage fees on it rather than to load out and sell the 5,000 bushels of wheat in the cash market. The amount by which the true value of price of physical storage space is actually greater than the futures contract-designated cost of storage is called the "wedge". This "wedge" ends up getting expressed in the wheat market in the form of wider than normal basis levels, and is a major factor that results in non-convergence of CME Kansas hard red winter wheat futures during periods of large grain inventories (such as exists now). And if the "wedge" that exists in any one year persists for a period of time, it can have a cumulative impact and can 4 P age

5 lead to excessively wide grain basis levels (i.e., cash prices being much lower than futures prices than on average or normal ). The threat of a cumulative impact in Kansas wheat basis is a serious issue in the Kansas wheat industry and the broader Kansas agricultural sector. If the wedge that currently exists were to persist over time, the cumulative impact could lead to extremely wide wheat basis levels in Kansas in the future. This situation would be similar to what occurred in the soft red winter wheat market in Ohio and other parts of the Eastern Corn Belt were during the period when wheat basis levels as wide as $1.50 per bushel under existed. During this period the soft red winter wheat market was affected by markedly wider basis levels and lower cash prices for wheat than would otherwise have occurred leading to lower wheat enterprise net returns expectations, and ultimately lower wheat production than would have other- wise occurred as crop producers responded to persistent low wheat enterprise profitability. Suggested Remedies for Non-convergence in CME KS HRW Wheat Futures Contract In response to non-convergence issues in the U.S. soft red winter wheat market in a VSR (variable storage rate) mechanism was established to allow CME Chicago wheat futures contract storage rates to flexibly and dynamically adjust according to a formula. The specific goal of establishing the VSR mechanism was to bring about better cash-futures convergence for Chicago wheat futures contracts. When the VSR came into being, Chicago wheat futures contract spreads widened considerably to reflect the now wider futures contract storage costs, and convergence between wheat futures and cash prices occurred. If a remedy to periodically occurring non-convergence issues is pursued for the CME Kansas hard red winter wheat contract, an alternative approach may be to adjust or increase existing fixed storage rates in futures contract rather than to formally adopt a similar VSR mechanism. If the fixed storage rates in the CME Kansas HRW winter wheat futures contract were raised enough by the CME to at least temporarily match or exceed the true value or price of physical storage space that would help to eliminate the motivation by longs who have been delivered on to pay storage fees on delivered warehouse receipts rather than to load out and sell wheat in the cash market. This action would impact the relatively small number and proportion of commercial grain traders who actually deliver or take delivery of wheat using warehouse receipts. But such a move would be expected to have a wider impact on the overall market and help to improve convergence of Kansas cash wheat and CME Kansas hard red winter wheat futures contracts. Benefits of Avoiding Changes in CME KS HRW Wheat Futures Contract One advantage of adjusting the storage rates within the CME KS HRW wheat futures contract rather than pursuing other potential remedies such as forced load out, cash settlement, easing of access to the delivery process, or other actions, is that there would be few changes to the current delivery system with the balance of market power and protections it provides between long and short position holders. Moving to a forced load out system would erode existing delivery system protections against market manipulation. When some firms are required to take a market action such as a forced load out, other firms may be able to exploit the inflexible, forced position of that same firm (i.e., being forced to load out ) by charging excessive loading and transportation fees. Instituting a cash settlement mechanism for grain futures contracts in general and the CME Kansas hard red winter wheat contract in particular would remove existing delivery system protections against market manipulation. Under cash settlement mechanisms, grain marketing-related agribusinesses or individuals with 5 P age

6 enough market power could possibly manipulate publicly reported grain bids to their advantage in the market place. If the cash grain price bids used in the construction of a cash price settlement index could be impacted either higher or lower, then parties impacted by the closing levels of the associated grain price index could benefit. Actions to make the delivery process easier by increasing the amount of warehouse space available for physical deliveries, expanding the allowable delivery territory, or reducing existing limits on issuing delivery instruments certainly merit consideration. However, there is not adequate evidence to prove conclusively that allowing for more actual contract deliveries or making other of these changes would bring about convergence, and may not consider how the markets would adjust to these changes. Also this approach would not address the incentive to hold delivery instruments rather than loading out and selling in the cash market, and could still leave hard red winter wheat cash markets vulnerable to non-convergence and associated wheat basis distortions in large inventory years. Considerations in Increasing in the CME KS HRW Wheat Contract Storage Rate Key questions to ask are "what is the true value or price of physical storage space?" and how is it calculated? In times when the true value or price of physical storage space is greater than the storage costs on delivered grain listed in the CME Kansas hard red winter wheat futures contract, the true value or price physical storage space is apparently a) at least as large the storage costs specified in the futures contract, and b) represented by the amount that the basis has widened from normal. It follows then that the estimate of the physical cost of storage is calculated by summing the costs that are known (i.e., the storage costs specified in the wheat futures contract), and the costs that have to be estimated (i.e., the amount by which hard red winter wheat basis has widened out beyond normal because of the existence of the positive wedge between the true value or price of physical storage space and the contract-specified storage cost on delivered wheat). Another key question has to do with the protein and quality specifications of the CME Kansas hard red winter wheat contract. If a sizable proportion of the 2016 Kansas wheat crop is below the 11% protein level in the futures contract, or even the 10.5% protein level with a $0.10 /bu futures contract price discount level, then it could hamper the ability of the CME Kansas hard red winter wheat futures price to converge with the cash price at designated deliver location grain elevators. This is because the wheat to be delivered by the short position holders against the long positions does not supposedly meet the futures contract specifications. That issue if it exists could also be contributing to the current wide basis levels. Summary and Further References The current wide wheat basis situation that exists in the Kansas wheat market has resulted mainly from large, plentiful inventories of available wheat in combination with other grains in Kansas grain elevators. These large inventories of grain have led to increased demand for storage space in Kansas grain elevators including those at approved delivery locations for wheat futures contracts. Because of this increased demand for grain storage space, the true value or price of physical grain storage at delivery locations has risen above the storage costs written into the CME Kansas hard red winter wheat contract. This difference is called a wedge, with a positive wedge occurring when the true value or price of physical grain storage is greater than the futures contract storage rate on delivered grains at delivery location grain elevators. When short position holders of CME Kansas hard red winter wheat futures contracts make delivery on their futures contract positions in the form of warehouse receipts, they force long futures position holders to take delivery of those same warehouse receipts. Then because of the positive wedge that currently exists between 6 P age

7 the true price of physical storage space and the storage costs in the CME Kansas hard red winter wheat futures contract, these long position holders have an incentive to hold and store these warehouse receipts that they have taken delivery of indefinitely rather than to load out and convert them to grain in the cash market. Long position holders have a financial incentive to continue to accumulate and store warehouse receipts they have taken delivery of as long as a positive wedge exists at delivery location elevators contributing to wider wheat basis levels and increasing non-convergence of Kansas wheat cash and futures prices over time beyond the specific delivery elevator locations. Possible solutions to the formation of such positive wedges between the true value or price of physical storage and lower contractual storage rates and the occurrence of non-convergence of cash and futures prices in Kansas hard red winter wheat markets would be to either raise the contractual storage rates to a level as high as physical costs of storage have even been or are likely to be, or to establish a variable storage rate (VSR) mechanism for the CME Kansas hard red winter wheat futures contract as exists for the CME Chicago wheat futures contract. The solution of raising the fixed storage rate on delivered grain that currently exists in the CME on the Kansas HRW wheat futures contract would help to solve the problem of non-convergence between cash wheat prices and wheat futures at delivery point location elevators and the broader Kansas wheat market. Low interest costs are another factor leading to non-convergence of Kansas wheat cash and futures prices. Low interest expenses reduce the economic total opportunity cost to long position holders how have been delivered on of holding warehouse receipts rather than loading out, stopping interest costs, and generating revenue in the cash grain market. If these periodic times of non-convergence in the Kansas wheat market were eliminated or reduced in frequency of occurrence and degree of price impact, it would benefit Kansas farmers in terms of more effective and efficient crop revenue insurance programs and wheat marketing strategies. It would also help Kansas farmers and agribusinesses make more accurate and profitable decisions in regards to crop enterprise selection and profit maximizing decisions in regards to use of farm assets. For more information regarding grain futures non-convergence issues see the following references: Adjemian, Michael K., Philip Garcia, Scott Irwin, and Aaron Smith. Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies, EIB-115, U.S. Department of Agriculture, Economic Research Service, August Garcia, Philip, Scott Irwin, and Aaron Smith. Futures Market Failure, Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. St. Louis, MO, April ( 7 P age

8 Figure 1a. Hard Red Winter Wheat Futures Closes, Kansas City MO Ordinary #1 Wheat Truck Bids, & Cash Basis Levels on Early Delivery Days for Futures MARCH 2000 through JULY 2016 Contracts + 8/8/2016 Closes & Basis $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 3/1/ /1/2000 5/1/ /1/2001 7/1/2002 2/1/2003 9/1/2003 4/1/ /1/2004 6/1/2005 1/1/2006 8/1/ /1/2007 5/1/ /1/2008 2/1/2010 9/1/2010 4/1/2011 6/1/2012 1/1/2013 8/1/ /1/2014 5/1/ /1/2015 KS HRW Wheat Closes KCMO Ordinary #1 Wheat Truck Bids KCMO Basis (Cash less Futures) Figure 1b. Kansas City MO Ordinary #1 Wheat Cash Basis Levels on Early Delivery Days for Futures MARCH 2000 through JULY 2016 Contracts + 8/8/2016 Basis $0.50 $0.25 $0.25 $0.22 $0.12 $0.18 ($0.25) ($0.50) ($0.75) ($0.70) ($0.58) ($0.73) ($0.80) ($0.37) ($0.30) ($0.58) on 8/8 ($1.25) 3/1/ /1/2000 5/1/ /1/2001 7/1/2002 2/1/2003 9/1/2003 4/1/ /1/2004 6/1/2005 1/1/2006 8/1/ /1/2007 5/1/ /1/2008 2/1/2010 9/1/2010 4/1/2011 6/1/2012 1/1/2013 8/1/ /1/2014 5/1/ /1/2015 KCMO Ord #1 Wheat Cash Basis 8 P age

9 Figure 2a. Hard Red Winter Wheat Futures Closes, Hutchinson KS Ordinary #1 Wheat Truck Bids, & Cash Basis Levels on Early Delivery Days for Futures MARCH 2007 through JULY 2016 Contracts + 8/8/2016 Closes & Basis $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 7/1/ /1/2007 3/1/2008 7/1/ /1/2008 3/1/ /1/2009 3/1/2010 7/1/ /1/2010 3/1/2011 7/1/2011 3/1/2012 7/1/ /1/2012 3/1/2013 7/1/ /1/2013 7/1/ /1/2014 3/1/2015 7/1/ /1/2015 3/1/2016 KS HRW Wheat Closes KCMO Ord#1 Truck$ Hutch Ord#1 Low$ Hutch Ord#1 High$ Hutch Basis (High Bid) Figure 2b. Hutchinson KS, & Kansas City MO Ordinary #1 Wheat Cash Basis Levels on Early Delivery Days for Futures MARCH 2007 through JULY 2016 Contracts + 8/8/2016 Basis $0.25 ($0.25) ($0.50) ($0.75) ($0.50) ($0.60) ($0.83) ($0.56) ($0.80) on 8/8 ($1.25) 7/1/ /1/2007 3/1/2008 7/1/ /1/2008 3/1/ /1/2009 3/1/2010 7/1/ /1/2010 3/1/2011 7/1/2011 3/1/2012 7/1/ /1/2012 3/1/2013 7/1/ /1/2013 7/1/ /1/2014 3/1/2015 7/1/ /1/2015 3/1/2016 Hutchinson KS Ord#1 High end $ Basis KCMO Ord#1 Truck Basis 9 P age

10 Figure 3a. Hard Red Winter Wheat Futures Closes, Wichita KS Ordinary #1 Wheat Truck Bids, & Cash Basis Levels on Early Delivery Days for Futures MARCH 2007 through JULY 2016 Contracts + 8/8/2016 Closes & Basis $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 7/1/ /1/2007 3/1/2008 7/1/ /1/2008 3/1/ /1/2009 3/1/2010 7/1/ /1/2010 3/1/2011 7/1/2011 3/1/2012 7/1/ /1/2012 3/1/2013 7/1/ /1/2013 7/1/ /1/2014 3/1/2015 7/1/ /1/2015 3/1/2016 KS HRW Wheat Closes KCMO Ord#1 Truck$ Wichita Ord#1 Low$ Wichita Ord#1 High$ Wichita Basis (High Bid) Figure 3b. Wichita KS, & Kansas City MO Ordinary #1 Wheat Cash Basis Levels on Early Delivery Days for Futures MARCH 2007 through JULY 2016 Contracts + 8/8/2016 Basis $0.25 ($0.25) ($0.50) ($0.75) ($1.25) ($0.49) ($0.60) ($0.72) ($0.84) ($0.68) 7/1/ /1/2007 3/1/2008 7/1/ /1/2008 3/1/ /1/2009 3/1/2010 7/1/ /1/2010 3/1/2011 7/1/2011 3/1/2012 7/1/ /1/2012 3/1/2013 7/1/ /1/2013 7/1/ /1/2014 3/1/2015 7/1/ /1/2015 3/1/2016 ($0.85) on 8/8 Wichita KS Ord#1 High end $ Basis KCMO Ord#1 Truck Basis 10 P age

11 Figure 4a. Hard Red Winter Wheat Futures Closes, Salina KS Ordinary #1 Wheat Truck Bids, & Cash Basis Levels on Early Delivery Days for Futures MARCH 2007 through JULY 2016 Contracts + 8/8/2016 Closes & Basis $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 7/1/ /1/2007 3/1/2008 7/1/ /1/2008 3/1/ /1/2009 3/1/2010 7/1/ /1/2010 3/1/2011 7/1/2011 3/1/2012 7/1/ /1/2012 3/1/2013 7/1/ /1/2013 7/1/ /1/2014 3/1/2015 7/1/ /1/2015 3/1/2016 KS HRW Wheat Closes KCMO Ord#1 Truck$ Salina Ord#1 Low$ Salina Ord#1 High$ Salina Basis (High Bid) Figure 4b. Salina KS, & Kansas City MO Ordinary #1 Wheat Cash Basis Levels on Early Delivery Days for Futures MARCH 2007 through JULY 2016 Contracts + 8/8/2016 Basis $0.25 ($0.25) ($0.50) ($0.75) ($1.25) ($0.61) ($0.72) ($0.88) ($0.68) 7/1/ /1/2007 3/1/2008 7/1/ /1/2008 3/1/ /1/2009 3/1/2010 7/1/ /1/2010 3/1/2011 7/1/2011 3/1/2012 7/1/ /1/2012 3/1/2013 7/1/ /1/2013 7/1/ /1/2014 3/1/2015 7/1/ /1/2015 3/1/2016 ($0.85) on 8/8 Salina KS Ord#1 High end $ Basis KCMO Ord#1 Truck Basis 11 P age

12 Figure 5. Kansas Grain Production & Stocks: 1969/70 through 2015/16 Marketing Years Million Bushels 1,400 1,200 1, s Farm Crisis & Freedom to Farm U.S. Ethanol & China Soybean Imports 12/1 Cn GS Sb Wht Stocks 12/1 Off Farm Stks Production Cn GS Sb Wht Off Farm 3 YrAvg Off Farm 7 YrAvg Figure 6. Kansas Grain Production & Off-Farm Grain Stocks: 1969/70 through 2015/16 Marketing Years Million Bushels 1,400 1,200 1, s Farm Crisis & Freedom to Farm U.S. Ethanol & China Soybean Imports 12/1 Off Farm Stks Production Cn GS Sb Wht Off Farm 3 YrAvg Off Farm 7 YrAvg 12 P age

13 Figure 7. Kansas Grain Production, Off-Farm Grain Stocks & Commercial Grain Storage (2008 & 2015): 2006/07 through 2015/16 Marketing Years 1,400 Million Bushels 1,200 1, , / / / / / / / / / / /17 Marketing Years 12/1 Cn GS Sb Wht Stocks 12/1 Off Farm Stks KS Upright Off Farm Storage KS All Off Farm Storage Production Cn GS Sb Wht 13 P age