There has been plenty of talk about the tightening global supply of wheat, and how this could see some volatility hit the market during the northern hemisphere spring. Here we take a look back for a guide to the sort of price target wheat growers might be setting for locking in some better prices on a rally.
Figure 1 shows the global supply and demand situation, with the ‘wheat stocks to use’ ratio set to decline for the second straight year and move to a new ten year low. In theory, this should result in higher wheat prices, but we know that the artificial price inflation thanks to the war in Ukraine has skewed pricing to the upside over the last three years.
If we purely compare the current stocks to use, of 32.3%, prices are similar. In 2013-14 stocks were on the way up, and prices during the US growing season ranged between 500 and 700¢/bu. Figure 2 shows the current price of wheat at close to 600¢, so you could say that the price is about right for the supply and demand situation.
Obviously, 600¢/bu was a much more profitable price for growers back in 2013-14 than it is now, but markets don’t worry about the cost of production until it causes supply to contract hard. We still aren’t expected to see this, with global wheat supply forecast to be at record levels despite lower prices.
Figure 2 shows that the two largest and sustained price rallies of the last 15 years have occurred in June. In June 2010, CME Soft Red Wheat (SRW) rallied 40% on the back of dry weather and a poor harvest in Russia which cut supplies and led to export restrictions.
In June 2012 we saw a similar rally as dry weather in the US cut yields, and saw global production tank for the second time in three years.
The only time we’ve seen a sustained rally in February or March was when prices had a sustained rally through 2021, on the back of weakening corn stocks, before spiking at the start of the war in Ukraine in 2022.
Most price rallies over the last 15 years have been in the order of 100-150¢/bu, and values have returned to previous levels quite quickly.
What does it mean?
A 150-200¢ rally from lows will give a price of 680-730¢/bu, which, at current exchange rates convert to an AUD price of $396-425/t. This is similar to the 2023-24 harvest pricing. Growers looking for an initial target could start here for the February to April hedging window.
As always, it’s wise to steer clear of pricing on northern hemisphere dryness in June, as those rallies are often sustained.
Key Points
- World wheat supplies are tightening, but prices remain subdued relative to recent years.
- Sustained price rallies often start in June, rather than earlier in the year.
- An initial wheat pricing target of $400/t would see growers take advantage of any short-term price spikes.
Click on graph to expand
Click on graph to expand
Data sources: Mecardo, CME, Bloomberg, USDA
