Dryland Cropping Newsletter for June 1999

Oregon State University

Extension Service 

Gilliam County Office

333 S. Main Street

P.O. Box 707

Condon, OR 97823

Jordan Maley, Dryland Crops Extension Agent

June 1999

Steelhead ESA Listing and Gilliam County

The National Marine Fisheries Service added the Steelhead trout to the Endangered Species Act (ESA) list in March 1999.   This designation will have an impact on agricultural producers in Gilliam County, although the timing and degree are yet unknown.   Now is the time to become aware of this environmental issue, and to consider how our production practices may be perceived as negatively affecting the habitat of the species.

Watershed monitoring will give us a better understanding of how agricultural production systems and climate affect local stream ecosystems.   The intensive monitoring currently underway in Ferry Canyon and its tributaries will provide information necessary to better understand how these local stream systems function.   Ongoing documentation of existing conservation practices and water-holding structures will serve to demonstrate agriculture's accomplishments in protecting the environment.

Gilliam County streams currently listed by a state or federal agency as Steelhead habitat include: Rock Creek, including the tributaries of South Fork, East Fork, Six Mile, Middle Fork., Dry Cr., Long Hollow, Juniper, Hahn Canyon, Lob Fork, Needle Fork, Brown Cr., Buckhorn Cr., Stahl Cr., and Wineland Canyon; Scott Canyon to Clem; Hay Creek Canyon including Dry Fork and part of the City Farm tributary; Cottonwood Canyon; Devil's Canyon; Ferry Canyon including the tributaries of Indian Spring and Lamberson Canyon; Long Hollow; Thirtymile Creek, including the tributaries of Lost Valley, East Fork, Dry Fork, Condon Canyon and Patill Canyon; and the Butte Creek tributaries of North Fork, Poodle Canyon and Greasewood Canyon.

The maps of Steelhead habitat vary greatly from agency to agency.   While a particular stream tributary may not be mapped as habitat, the land management practices in that drainage may still be scrutinized for any potentially negative impact on a listed stream into which it flows.   Additional information on the ESA listing will be presented here as it becomes available.

Wheat Options

Introduction

Last issue I discussed how a producer might meet a minimum price objective with put options.   There are, however, other factors which may affect how successful you are in meeting a minimum price objective.   For soft white wheat (SWW) producers, the most significant of these is a decline in the basis.

SWW Basis Dilemma

Pricing options to protect against lower prices can be a challenge for soft white wheat producers.   The SWW futures contract traded on the Minneapolis Grain Exchange (MGE) generally does not have adequate volume (number of contracts being traded) to allow a producer to readily secure a seller or a buyer for the contract.   MGE offers options on the SWW contract, but trading of options does not extend far enough into the future to make it an attractive tool with which to hedge a crop.  

On the other hand, the Chicago Board of Trade (CBOT) soft red wheat (SRW) contract is traded in high volume, allowing producers to easily move in and out of contract positions.   CBOT options on SRW contracts are also advantageous in that they are traded far enough into the future to make them a powerful hedging tool.   The risk of hedging with SRW contracts or options on these contracts is the difference between the CBOT futures price and the SWW cash price—the basis.

With the chart on page 5, you can see the SWW basis may vary widely both within the growing season and from year to year.   A strong SWW basis at seeding time could decline significantly before harvest, impacting the use of Chicago Board of Trade SRW options in meeting a minimum price objective.   The basis could decline with a greater than expected drop in the SWW cash price (receiving less at the elevator at harvest) while the SRW futures price remains stable.   The basis could also decline with a stronger than expected   SRW futures price (reducing the value of an option on a futures contract) while the SWW cash price remains stable.  

The following scenarios will illustrate how basis risk can affect the use of SRW options in meeting a minimum price objective. Calculations do not include shipping costs or the Oregon Wheat Commission tax.   Please note that all examples are in dollars and cents per bushel.  

Minimum Price Objective and Basis Erosion

In October the Chicago Board of Trade (CBOT) SRW futures contract for the following September is trading at $4.10.   The producer's minimum price objective is $4.15 in August after the crop is harvested.   For August, the projected average SWW basis is $.25, and the option brokerage fee is $.05.   The producer selects a strike price that, after adding the positive basis and subtracting the premium cost and brokerage fee for the option, would yield a net $4.15.   A CBOT soft red wheat put with a $4.20 strike price and a $.25 premium appears to allow the producer to meet the minimum price objective of $4.15:   $4.20 + .25 - .25 - .05 = $4.15 (strike price + basis – premium – fee = minimum price objective).

Basis drops to zero: The September soft red wheat (SRW) futures contract drops from $4.10 in October to $3.50 by harvest.    Because the option has intrinsic value, the producer exercises the option to sell the SRW futures contract for $4.20 and immediately buys the contract back at the current market of $3.50, realizing a profit of 70 cents on the transaction.   However, the SWW cash price has also dropped to $3.50 by harvest, resulting in a “zero” basis ($3.50 SWW cash - $3.50 SRW futures = zero basis).   The producer sells the wheat for a cash price of $3.50 ($3.50 futures + .00 basis = Portland cash price).   The net price calculation would be: $3.50 futures + .00 basis - .25 option premium - .05 option broker fee + .70 futures profit = $3.90 net profit.   Outcome: producer fails to meet the $4.15 minimum price objective with the put option due to a decline in the basis.

Basis becomes negative: The September soft red wheat (SRW) futures contract drops from $4.10 in October to $3.75 by harvest.    Because the option has intrinsic value, the producer exercises the option to sell the SRW futures contract for $4.20 and immediately buys the contract back at the current market of $3.75, realizing a profit of 45 cents on the transaction.   The SWW harvest cash price is $3.50, resulting in a negative $0.25 basis ($3.50 SWW cash - $3.75 SRW futures = negative $0.25 basis).   The producer sells the wheat for a cash price of $3.50 ($3.75 futures - .25 basis = Portland cash price).   The net price calculation would be: $3.75 futures - .25 basis - .25 option premium - .05 option broker fee + .45 futures profit = $3.65 net profit.   Outcome: producer fails to meet the $4.15 minimum price objective with the put option due to a decline in the basis.

This concludes the series on hedging with commodity options.   I plan to present a workshop this fall or winter on the use of options for crop production hedging.    If you have questions about any of the information discussed here, please do not hesitate to contact me.

Wheat Markets

Futures

The soft red wheat futures market strengthened the first half of June, but weakened the last half of the month.  

Cash

Portland cash price for prompt delivery has risen about five cents since the last of May.   The new crop cash price closed at $3.21 (for July and August delivery) on June 24 th .   Club wheat premiums have risen to $0.80 per bushel for new crop—a $0.20 increase since the end of May.

Basis (Cash/Futures)

The nearby basis remains strong, and is still significantly above average for this time of year.   At Thursday's (24 th ) close, CBOT soft red wheat May futures settled at $2.50 while Portland nearby cash price settled at $3.21.  

Ag Day 1999

Planning will begin soon for a Gilliam County “Ag Day” in October.   A committee composed of representatives of the Gilliam County Wheat Growers, Cattlemen, Farm Bureau, Extension Service and the Condon High School FFA will meet next month to discuss the upcoming event.

Ag Day will include the annual meetings of all Gilliam County agricultural groups, and a

combined annual banquet.   The banquet will include one or two notable agricultural speakers as well as a delicious meal.   If you have any suggestions about the organization of this event, or would like to participate in the planning process, contact Jordan Maley at the Gilliam County Extension Service office.

Biological Control of Canada Thistle

In the May issue of the Ferry Canyon Watershed newsletter, I mentioned research to be conducted on the biological control of Canada thistle.   The project includes investigating the effectiveness of insects and bacteria in controlling this noxious weed in areas adjacent to streams, springs and ponds.   Based upon the results observed this season, we can be cautiously optimistic about the future of these weed control strategies.

Bacteria

Pseudomonas syringae (Pst) bacteria were applied twice to plants located in three separate plots in Ferry Canyon.   The organisms visibly damaged the plants within an hour or two of application.   Plant leaves turned black within a day of treatment, but the damage was not uniform over the leaf surface -- reducing the effectiveness of the control.   Within one month of treatment the sprayed plots were recovering from the effects of the bacteria, which may indicate the organism's effect on the plant is short-lived.

This material is in the early stages of commercial development.   The results of my experimentation with the bacteria indicate that multiple applications would be necessary in order to achieve an acceptable level of control.   The Pst does seem effective in suppressing Canada thistle development, and might be suitable in an integrated pest management program.

Insects

Insect control of weeds is a long-term program, and the effects are usually not apparent for several years after release of the organisms.   It is important for the insects to be adapted to the climate of the release area, and in some cases they may not survive to reproduce in areas where the weather is not favorable for them.   The insect biological control plots will be monitored over a five year period to evaluate the effectiveness of this Canada thistle control strategy.

Thistle stem weevils (C. litura) were released on Canada thistle plots in early May.   These insects attack the young thistle as they emerge from the soil in early spring.   Their immature larval offspring “mine” the stem of the plant as it grows during the summer.   The fully developed larvae bore out of the plant near the root crown, and adult weevils over-winter in the soil.

Thistle stem gall fly (U. cardui) were released on the plots in late June.   The fly lays eggs on the growing thistle plants in early summer.   The developing larvae attack the main and lateral stems of the growing plant.   Hard, woody galls form on stems, depriving the plant of nutrients needed for normal growth and reproductive functions.

Thistle flower head weevil (L. planus) will be released in late July.   The larvae of this species feed on seeds in the flower head.   The adults feed on plant foliage, and often cause severe defoliation.   These insects are known for their hardiness, and are capable of spreading over large areas.

Climate

May rainfall for the Arlington station amounted to 0.42 inches—below the 30 year average of 0.65 inches for the month. Precipitation for the Condon station during the same period was 1.37 inches—close to the long-term average of 1.42 inches for this location. Cumulative crop season (September through May) rainfall for the Arlington station is 9.05 inches, still above the 30 year average of 8.83 inches. Condon station cumulative rainfall amounted to 8.93 inches, well below the 30 year average of 12.53 inches.  

For both locations, May rainfall was unevenly distributed and fell in small amounts at a time. Generally speaking, rainfall in amounts less than ¼ inch are not considered to be effective precipitation due to evaporation from wind and warm air temperatures. With the exception of the 0.38 inches falling in Condon on May 6th, most rainfall for the month came in amounts of less than ¼ inch.

June rainfall has not been adequate to halt the decline in crop conditions. The Condon station has reported a total of 0.28 inches for the month, most of which fell during a thunderstorm on the 24 th . Rainfall that day was unevenly distributed, with Ajax receiving 0.09”, Igo 0.10”, and Tri-W on the north of Shutler Flat receiving less than a tenth of an inch.

CBARC Field Day Notes and 1999 Research Publication

The Columbia Basin Agricultural Research Center held its Field Days on June 15 th and 16 th in Pendleton and Moro respectively. If you were unable to attend either of these events, but would like a copy of the publications made available there, we can help.   I can make copies of the handouts from the Moro Station field day, and CBARC has provided us with copies of their 1999 research report.   If you would like either one of these publications, they are available from the Gilliam County Extension Service office.

Historical Extension Reports

In the November 30, 1938 report by County Agent McKennon the following was recorded: The County Economic Conference held in February 1938 recommended that 61,000 of the 260,000 acres of farmland in Gilliam County be removed from production.   The conference committee further suggested 30,000 of the acres diverted from production be seeded to permanent grass cover, while the remainder be rotated between grass and wheat production.

The report when on to report a survey of 28 Gilliam County farms showed that 9 of them had lost 25% of their topsoil, 17 had lost from 25-75% of their topsoil, and 2 had lost greater than 75% of their topsoil.   The survey was considered representative of the average condition of county agricultural land.   The situation was attributed to 40+ years of wheat/fallow rotation, which had resulted in decreased organic matter and moisture holding capacity of the soil.

Russian knapweed and Morning Glory were identified as perennial noxious weeds in the county.   Sodium chlorate was the recommended treatment for patches of less than ½ acre.   Crested wheat grass seeding was considered effective in controlling larger infestations

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