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Tuesday, July 01, 2014

Dusting off the crystal ball – with some help from seasonality

By Angus Brown  |  Source: CME

Key points

  • The seven week fall in CBOT wheat prices has growers looking at closing out swaps and taking profits.
  • On average, wheat prices rise from June through to September, but there is downside possible.
  • Closing out swaps now will open exposure to a further $30 downside, but increase exposure to upside, which historically, is more likely.


2014-06-30 Crystal Balling Wheat Prices FIG 1

2014-06-30 Crystal Balling Wheat Prices FIG 2

The protracted seven-week decline in wheat markets has growers who forward sold on swaps currently sitting on some pretty good profits. The question now is whether to take these profits, or hold on to protect against further downside. As always, historical price movements generally give the best insight into where markets might head from here, so out comes the crystal ball.

Figure 3 shows the CBOT December wheat price decline over the past 7 weeks, with the fall from the March and May peaks now at $60/tonne.  Any wheat sold on swaps from March to May will now be $40-60 in the money. Given the new financial year starts today, this would make a nice cash injection to most businesses.  The obvious risk with closing out swaps now is that prices continue to fall, with growers fully exposed to further price declines.

With the wheat market currently being depressed by harvest pressure from the northern hemisphere, a very basic view would be to expect a rally in prices once this pressure comes off.  Historical price movements support this theory. Over the past 14 years, the average monthly CBOT wheat price has risen on 4% from June to July (figure 1), 7% June to August, peaking at 11% from June to September. 

Obviously there is a wide range around the average. The green shaded area shows the range for which prices have occurred 67% of the time.

The wide range in historical changes in wheat prices illustrates the volatility observed in the wheat market in the second half of the year.  There have been some very large price rallies, such as a 61% price rally from June to December in 2007 and 70% in 2010.  The largest fall from June to December was 36% in 2008.

In terms of price, figure 2 shows the effect of the changes, when applied to the June average price. The chance of a price rise is more likely than a price fall, with the absolute levels fitting pretty well with our fundamental supply and demand analysis.    

Figure 3. CBOT Dec-14 wheat futures

2014-06-30 Crystal Balling Wheat Prices FIG 3

What does this mean?

CBOT wheat prices have fallen from June to December in five of the past 14 years. This basically means that there is a 36% change of further downside, but this downside is limited to around $30/t.  On the other hand, there is a 64% chance of prices rising; with upside to $350-400/t if there is a real disaster somewhere.

Add to this analysis the forecast El Nino (although there are plenty of sceptics as to the impact) and it paints a reasonably strong case for taking wheat swap profits now and taking a ‘wait and see’ approach to wheat prices over the coming six months, and being prepared to hold onto some grain if prices continue to decline.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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