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Thursday, February 08, 2018

The past, the future, and a nice little present.

By Andrew Whitelaw  |  Source: CME

Key points

  • The market has rallied in recent weeks, but we are still well below the average across all futures markets.
  • Seasonally, Jan/Mar tends to see a rally, but regularly this can fizzle out in march.
  • Although futures are higher, will basis remain steady or will it deteriorate further?

2018-02-08 Grain Fig1

2018-02-08 Grain Fig2

“Study the past, if you would divine the future (or did he mean futures)”, Confucius. The market has trended higher since the start of the year, providing us with a nice little present. In this analysis, we delve into the seasonality of wheat futures, to determine whether the past gives any indication into our future.

Regular users of Mecardo would be aware of our seasonality charts, which aim to give an idea of how the market is currently trading compared to differing timeframes. In recent weeks, we have had a deluge of new users, and its worthwhile refreshing the methodology.

The seasonality charts represent the market over a period of time on a weekly basis, in this analysis we are examining 2010 to present. In these seasonality charts, rather than use a min/max for the seasonality banding (green shaded area), we use a 70% range (or 1 standard deviation). The 70% banding is used to remove the extremes in the market place, and we believe this gives a better indication of the seasonality, as opposed to a min/max which can be extremely volatile. In these charts we also overlay the average for the timeframe, and the last three seasons.

In figure 1, the Chicago soft red winter wheat (SRW) contract is displayed. This is the benchmark futures contract for the world, and is the most heavily traded. The market is currently at 461¢/bu, with an average for the current week of 448¢/bu. Overnight the market rose considerably, and as we go through the week at higher levels the average will obviously increase. The market is currently well below the long-term average, and although we have experienced a short jump in values, we remain at similar levels to the same week last year. It is almost uncanny how similarly we are tracking thus far, albeit only six months into the year.

The Kansas hard red winter contract (HRW), is displayed in figure 2. In recent years the HRW, have followed one another closely. The pattern for this season is again very similar to the past season.

If we look at the seasonal banding for both HRW and SRW, over the course of time there has been a tendency for a rise towards the end of January through February, with a fall in March. This would fit in with traders pricing in northern hemisphere weather risk into their models. In instances when the weather risk is reduced over time, then the market will correct.

The market has currently given producers a present, provided basis doesn’t deteriorate further. The question remains, will the weather woes be enough to push the market higher, or will as we have seen in recent years will the risk fizzle out?

What does this mean?

The market will be keeping an eye on the fundamentals over the coming months. The world still sits on a massive stockpile of wheat, which will place limits on upward potential. However if weather continues to be poor for production in the US, then we will likely see stronger pricing (at least for futures).

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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