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Thursday, May 24, 2018

Wheat: Where we are, and what we should do.

By Andrew Whitelaw  |  Source: CME & Mecardo

Key points

  • Fundamental factors are driving the market, with concerns in the USA, Russia and Australia.
  • The spot wheat future market is close to the highs of last July.
  • Taking out a hedge for the 2019/20 harvest is likely to result in a price >A$300.


2018-05-24 Grain Fig 1

2018-05-24 Grain Fig 2

The wheat rollercoaster continues to run its course. In the past month we have witnessed a large degree of volatility. In this article, we look at wheat from a seasonal point of view to determine the position of the market.

After a series of years with little positive news for wheat markets, we are now turning the corner. It was inevitable, as all markets are cyclical in nature. The concerns are mounting around the world;

  • Drought conditions in the US in conjunction with the lowest area planted to wheat in 100 years.
  • Dry conditions over the next ten days in the major black sea region cropping areas.
  • Although rain is expected in many areas this weekend, this will only provide a respite.

In figure 1, the Chicago soft red winter (SRW) spot wheat contract is displayed from 2010 to present in order to show the seasonality. In this chart the green banding is the standard deviation for each week, in order to remove the more extremes of the market. The 2018 season has overall shown tremendous strength in recent times, the spot price is close to the highs of last July. Although we still sit currently close to 100¢/bu below the average for the 2010 to present period, we are creeping towards this level.

The rally last July was largely speculator driven, and last year’s issues were a quality concern as opposed to quantity. This season, there are fundamental drivers to allow the market to continue to remain strong. We do have to keep in perspective that the world, does however remain well stocked with wheat, subject to a number of issues (read here).

There is no one size fits all strategy which will work year. It is important that we regularly review our grain sales strategy. There is a tendency to focus on the harvest in front of us, instead of the far horizon. Nonetheless, there is a good opportunity for the 19/20 harvest. In figure 2, the forward curve for wheat futures is displayed (in A$).

The current market structure allows for a producer to lock in the futures component of their wheat price at levels just shy of A$300. This locks away between 70-80% of the overall wheat price, with basis to be later included when the physical sale is made.

In Australia the tendency is for a positive basis level, this would provide the grower with some ‘cream on top’ leaving a >$300 price based on historical analysis.

What does this mean?

The market remains volatile, with fundamental factors continuing to drive markets higher. This is the first rally in the past two years, with the potential to be sustained. We do however, have to have some perspective and remind ourselves of the large global stockpiles.

By looking to the horizon, grain growers in Australia are able to secure strong prices for the 2019/20 harvest. One risk in locking in the futures component for the 2019/20 harvest is that in the event of the market continuing to rise, you will lose that potential.

It is prudent to hedge in small bites, as this will enable you to continue to participate in higher markets, and conversely reduce exposure to the downside. 

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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