Farmers need to be keeping their eyes on the market regularly to capture opportunities as they present themselves.
Let’s have a look at what is on offer for next season. The first chart below shows the forward curve for Chicago wheat futures, expressed in A$. The curve is much flatter than normal. At present, it is possible to lock in your wheat’s futures/fx component through your bank at A$414* for the next harvest.
The market is currently being driven by the tension on the border of Ukraine. If this fizzles out and no conflict occurs, and in the absence of any further bullish drivers, then the market will lose steam and will be quickly back below A$400. If a conflict does erupt, then the market will take off like a rocket.
The average CBOT spot futures price for the period 2010 to present is A$255. A$414 is a good number in anyone’s books and only A$15 off the top for that period.
The second chart shows basis between ASX and CBOT wheat from 2010 to the present. It is important to note that the basis has to be added/subtracted from this. At the moment, we are experiencing a negative basis (learn more about basis here).
If taking out a futures contract, you will have to formulate a view on whether the basis will return to normal. A smaller crop will do this, or whether a big crop will keep basis at a large discount. If the basis returns to a premium, then the overall price returned will be higher, and vice versa.
The third chart shows ASX January 2023 wheat contract against the CBOT wheat December 2022, the coming harvest. As we can see, the ASX contract, which correlates well with physical bids, is trading at a large discount.
If forward contracting this year, it is important to calculate what is the most appropriate avenue to use. Opportunities present themselves throughout the year; grabbing small portions isn’t an unreasonable strategy.
*Excluding bank charges