Assume you are a wheat producer in eastern Colorado. You have 3200 acres (or 5 sections) in production and your potential yield (based on a trend-yield projection) is 37.5 bushels per acre. Production costs are $145 per acre.

It is currently December 1, 2020. You are considering hedging some of the wheat crop which you will market at harvest in early-July or which you will store until early-October. If you store the grain, you will only do so until October because you will need the cash flow to meet a production operating note payment. You have made a small basis table and include the basis information for the relevant months. Averages and standard deviations are reported below.

	Potential Futures Contracts
Calendar Month	MAR	MAY	JULY	SEP	DEC
Harvest Transaction Month July	----	----	-0.56 (0.47)	-0.65 (0.53)	----
Storage Transaction Month October	-0.98 (0.50)	-1.01 (0.52)	----	----	-0.85 (0.48)

A. It is December 1, 2020 and the current KC wheat futures prices are

12/1 DEC $5.60/bu. MAR21 $5.68/bu. MAY $5.55/bu. JUL $5.50/bu. SEP $5.64/bu. DEC $5.80/bu.

Evaluate the profit opportunity for hedging until harvest. You will need to pick the best contract for the production hedge from the nearby and next-to-nearby contracts. Ignore any difference between actual bushels and hedged bushels unless you are specifically asked. Label the two different futures contracts.

Production Hedge: Contract Production Hedge: Contract

Forward Price $___/bu. Forward Price $____/bu. Production Costs $___/bu. Production Costs $___/bu.

Profit $___ /bu. Profit $___ /bu. Risk $____/bu. Risk $____/bu.

Which contract will you use for the production hedge?