Look to the horizon for grain.
The Snapshot
- The forward curve represents the horizon for a futures markets. It shows each trading expiry date.
- The market can be in either contango or backwardation.
- A market in contango is where the forward months are trading at a premium to present; backwardation is the opposite.
- The wheat market has tended towards contango in recent times.
- The market tends to pay ‘carry’ or a premium for forward months.
- The current harvest price is A$311 (+/- basis) and for next harvest is A$345 (+/- basis)
The Detail
It’s nearing the end of September, and the days are ticking down until the headers are rolling. A lot of thoughts are turning to the logistics of the operation from organising contractors to finding harvest staff.
The marketing of grain is not in front of many’s mind. However, marketing is an activity which should be conducted in advance, during and after harvesting.
Through managing your grain sales, it allows you time for other activities that arise and to mitigate the risk of adverse movements.
A tool worth using is the forward curve. The forward curve is a chart that we often refer to in EP3 articles as it provides a quick view of the market. The forward curve details the price for each of the contract expiry date for the futures contract of a commodity.
The curve gives an instant snapshot of where you could theoretically buy or sell the commodity. The below chart displays the forward curve for Kansas & Chicago wheat converted to A$/mt. This lets us know the price for each contract data between spot (Dec 2024) and March 2026
The forward curve can be in either contango or backwardation. In typical financial/economic gobbledygook fashion, the terms sound more complicated than reality. Although there are a range of economic theories behind contango and backwardation, I’ll try to explain succinctly below.
Contango:
A forward curve is in contango when the forward futures months are at a premium to the spot level. In the above chart, the market is in contango, as each of the months ahead is higher than the September contract.
The futures market in contango is effectively paying a premium for the seller to carry the crop.
Backwardation:
As you might expect, backwardation is the opposite of contango. The forward curve is in backwardation when the forward market is trading at a discount to the spot market.
When in backwardation, the market is effectively wanting access to grain as soon as possible and does not want to pay you to carry the grain.
How to use it as a farmer?
The wheat futures market in recent years has tended to be in contango, and effectively provided a premium versus spot. This offers the opportunity to lock in futures on the forward curve i.e beyond the current harvest at a premium to spot.
It is important to note that the price can (and will) change between taking out a contract and when it expires. However, if you are locking in a price that you are happy with, then that becomes less of an issue.
Through using the forward curve, you can ‘bank’ the carry, on the proviso that you are locking in a suitable value.
