By Andrew Whitelaw | Source: CME, Mecardo
Wheat is generally a homogenized commodity, however, when it comes to hedging there are multiple options available. In this article, we look at the major US-based wheat futures contracts.
There are three major US-based wheat futures contracts; Chicago, Kansas, and Minneapolis. These contracts are based on different geographies with distinct specifications. As a result, the contracts can trade at varying spreads.
The Kansas contract is known as hard red winter wheat (HRW). The HRW wheat crop is grown in Texas, Nebraska, and Kansas. The HRW is mid protein (min 11%*) and is therefore perfect for producing bread. As a winter wheat, it is planted straight after harvest (August/September) with harvest occurring during the following summer (late May/August).
The Minneapolis contract is known as hard red spring wheat (HRS). HRS is grown in the northern plains (Idaho, Wyoming, Montana & Dakota). The HRS is high protein (min 13.5%*), again like HRW is perfect for bread production, also for blending purposes. The crop is planted in spring (April/May) and is harvested during the summer months (August/October). The growing season is what contributes to the high protein levels.
Finally, is the Chicago contract. Chicago contract is soft red winter wheat (SRW). The SRW contract is low protein, with a typical profile of 9.5%. This crop has a similar planting and harvest window to HRW and is used for pasta, animal feed and biscuits.
The SRW contract is the most often discussed and is considered the global benchmark for pricing wheat. In Figure 1, the volume for each contract on a five-day moving average is displayed since the turn of the century. It is quite clear that SRW has the lion share of volume; on average it holds 71% of the daily volume of US wheat futures.
In Figure 2, each of the three contracts is displayed since the start of last year. As we can see during the middle of last year, the HRS contract started to deviate from the HRW/SRW contracts. This was due to drought conditions impacting on the quantity of high protein spring wheat being produced. During June/July last year, this started to pull the other contracts up, however, the issues in the market at that time were of a lack of quality wheat as opposed to a quantity (of lower protein).
In Figure 3, the spread between HRS and SRW is shown. As we can see, the HRS tends to trade at a premium to SRW, due to its higher quality profile. The average spread has been A$36/mt, and as spring wheat conditions deteriorate the spread will increase dramatically. This can provide opportunities for hedging when we believe that the spread will increase. Alternatively, we might decide to sell the HRS contract if we believe the premium has become too high.
Although the Chicago contract is the most frequently discussed, it is important to be aware of the other contracts. When deciding to hedge your wheat production (or purchases) it may be appropriate to use alternatives to the Chicago contract.
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