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Thursday, May 17, 2018

Wheat Deciles.

By Andrew Whitelaw  |  Source: CME, Mecardo

Key points

  • Deciles provide an invaluable snapshot of market performance.
  • Physical APW1 prices are for the most part at high decile levels.
  • CBOT wheat futures remain at low decile levels.

Mecardo have provided our subscribers with a monthly repository of deciles for a wide range of commodities. Decile tables are one of the most important tools to assist in pricing commodities. It has been a while since we discussed them in relation to wheat.

It’s important to firstly provide an overview of what a decile (or percentile) is and how to read them. Historical prices will obviously not tell you where the price will be next year or the year after.  However, they can provide an indication of the range in which prices have moved and how much time they have spent at varying levels. 

Deciles (or percentiles) provide one way of estimating what may happen in the future by looking at what has happened in the past.

A percentile is a measure of how often, historically, prices have fallen above or below a particular price level. It gives a brief snapshot of whether a market has more upside or downside, and how large this may be.

For example, if a price is at its 67th percentile, this means that 67% of historical prices have been below that value, and 33% of prices higher.  Similarly, a 90% percentile means that, 90% of the time, prices have been lower than a particular price, and higher just 10% of the time.

Now that we understand the purpose of a decile table, lets take a look at them in relation to wheat. As we all know the wheat market has been very volatile over the past month, and deciles are a good way of determining where the value is.

In table 1, the deciles for APW1 wheat across a number of major zones in Australia is displayed. As we can see, the rankings range from 58% through to 97%. This points towards Port Kembla pricing being very close to the top prices offered in the period 2010 to present. If we are merely looking from a historical perspective, and not the current situation on the ground, this would be considered a strong selling indication.

Let’s look globally. In table 2, the CBOT wheat futures are displayed. This table shows each of the continuous contracts from 1 through to 9 contracts ahead of spot. All the contracts are at a decile ranking of 30-35%. This effectively tells us that CBOT futures are at low levels, with the spot contract only being lower for around 30% of the time since 2010. This would indicate that it is a poor selling opportunity.

Although to reiterate, these tables should never be used in isolation. However, from a simple analysis it would be more beneficial to sell physical, as it has from a historical perspective a higher chance of falling. Whereas wheat futures would be considered a buy, as it historically has been higher.

What does this mean?

Decile tables are a valuable tool for gaining a snapshot on the market. They do however have to be used with caution, to ensure the best decision is made.

The best way to use deciles is in combination with a strong view on the market structure, which luckily you can get from keeping up with the Mecardo updates.

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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