The usual shape of the forward curve in wheat markets is what they call contango. Contango is where future prices are higher than the spot market. The opposite of contango is backwardation, and this is where we are at currently.

Grain prices are usually higher in the future.  The obvious reason is that it costs money in both storage and interest to carry grain into the future.  When the spot market is at a premium to future prices, it suggests grain will be cheaper in the future, and there is some sort of squeeze happening in the market.

Figure 1 shows the futures curve for Chicago Soft Red Wheat (SRW) in US terms.  May Futures are slightly higher than the spot March contract.  The new crop is expected to see the market fall back to under 630¢.  There is some carry in the market to December and March before the market drops in July.

The shape of the forward curve suggests the market is banking on the next two world wheat crops.  When we look at corn however, we see the curve is in stronger backwardation than wheat.  Chinese demand for feed grain and tight supplies out of South America have caused a short squeeze, and a strong discount.

Corn is driving wheat higher in the spot market, but wheat returns to more of a normal premium in futures as the supply and demand imbalance is normalized towards the end of the year.

When we convert wheat futures prices to the Australian dollar value we get the curve in figure 3.  Converting to Aussie dollars doesn’t make the curve look any better, but growers can still lock in values above $300 per tonne on futures or swaps. 

Multigrade wheat contracts for harvest 2021-22 are currently sitting at around $305/t, which is close to zero basis to Chicago SRW, so at least local markets are in contango, although the premium for 20-21 is not as much as it will cost to carry wheat into the new harvest.

What does it mean?

Markets will always revert to their normal curve.  In grain markets this means that at some stage the spot price will fall, or futures prices will rise to see the market back in contango.  For wheat producers this means wheat is good selling in the short term.

For grain consumers wheat is better buying in the future.  Hedging new crop above $300 might seem expensive, but it’s better than buying physical and carrying through the year.

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Key Points

  • Wheat and corn markets are currently in backwardation, with no carry in futures prices.
  • Local prices for new crop are slightly higher than spot prices, but not to the level of carry.
  • Growers holding physical should think about pricing as upside seems limited.

Click on figure to expand

Click on figure to expand

Click on figure to expand

Data sources:  Mecardo

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