Quality forecasts: Predicting when and how much markets value higher-protein wheat

Abstract

Wheat markets stand out among other major crop commodity markets because pricing at the first point of exchange—typically a grain handling facility—is differentiated on specific quality characteristics. Moreover, the premiums and discounts that elevators offer to obtain grain of specific quality can be significant. The relative importance of quality premiums and discounts to farm-level production and marketing decisions demonstrate a need to quantitatively measure and explain factors that affect elevators' wheat-quality pricing decisions. This study develops an informed expectation model of elevators' quality-based pricing strategies and empirically estimates the model from a lengthy dataset of weekly price observations. I find empirical evidence that elevators use linear pricing schedules, but more aggressively discount wheat with protein levels lower than a baseline than reward higher-protein wheat. The results also indicate that weather characteristics, futures contract price indicators, and USDA Crop Progress reports are contributors to predicting the new crop protein premiums and discounts, and that out-of-sample accuracy for predicting how grain elevators will value wheat protein ranges between 70% and 80%.