While world feed grain and cereal prices are nothing to get excited about for producers, they do represent value for grain consumers. At this time of year, it can be hard to secure physical forward pricing, but there are other ways to protect against price upside.
This harvest has seen feed grain prices largely settle in the low $300/t level for most delivered markets. This is the cheapest feed grain has been since 2021. Feed grain did get as low as $200/t in 2017 on the back of heavy world supply, but it is hard to see prices getting back to those levels.
Increases in costs of production would see grain production cut in the face of prices in the sub $250/t levels in our terms. This is not to say that a big world crop won’t see grain prices drift lower over the coming year, but risk to the downside seems limited.
With this in mind, growers would be reluctant to take forward pricing around $360/t on offer for new crop APW on a port basis. Last week we outlined what can happen in grain markets in June and July if seasons go awry in Russia or the US. With current world wheat stocks relatively low, rallies in the order of $100/t are not out of the question.
With futures markets, grain consumers don’t have to find a grower or a trader willing to sell them physical grain in December to protect against upside. Using wheat futures, swaps, or even options can protect against price upside. The main risk between now and September is a rally on international markets.
The highly liquid CME Soft Red Wheat (SRW) Futures can be used to protect against upside. With the fall in SRW last week, December 25 futures can be bought for $360/t in our terms if currency protection is taken as well.
If the SRW Futures rally to $400/t by December, the consumer will be able to close out for a $40 profit, and spend that on physical wheat, which will have also rallied. If the market falls to $300, the consumer will lose $60 but be buying cheaper wheat.
There is ‘basis’ risk on trading international contracts against local purchases. Basis risk comes in if there are dry conditions locally, which push prices higher relative to SRW. This means higher physical prices might not be offset fully by profits on futures.
Basis risk can be somewhat mitigated by converting SRW positions to local physical contracts, or ASX Futures in August or September when local markets are more liquid.
What does it mean?
If consumers can get their heads around using futures or swaps to manage grain price risk, it can be preferable to taking physical positions, in terms of cost and ability to easily move in and out of positions. It is best to use a qualified advisor when considering using futures.
Key Points
- Wheat prices, at a four-year low, present an opportunity for consumers to manage costs.
- Using SRW futures will potentially protect against price increases due to weather issues in the Northern Hemisphere.
- Local basis needs to be managed later in the year when production risks arise
Click on figure to expand
Click on figure to expand
Data sources: CME, Mecardo, Refintiv, Bloomberg
