Seasonality exists in most agricultural commodity markets. Prices tend to move in similar patterns at certain times of the year, as supply, demand, and uncertainty shift with the seasons. A recent query we received was around how wheat prices trend as we move through spring towards harvest.
Long-time readers will know we like to split wheat values into two separate components when looking at prices. The CME Soft Red Wheat (SRW) is the base of wheat prices, as most of our wheat is sold into international markets, which compete with SRW.
The ‘basis’ is the other component, and it is simply the local premium or discount to SRW. Some like to split currency out as well, as the exchange rate impacts the value of SRW in our terms, but for the purpose of the analysis, we’ll assume the AUD/USD has minimal seasonality.
Figure 1 shows the average price of wheat each month for the 19 years from 2006 to 2024. Wheat prices are highest in the first quarter, as that is peak uncertainty for northern hemisphere winter wheat crops. The risk premium is built in.
As the season progresses, the risk premium declines, and harvest pressure sees prices bottom out in July. After the US winter wheat harvest, SRW prices increase into October before weakening into the end of the year.
The seasonality looks large until you look at the Y scale. There is only $15/t between the high in March and the low in July. Figure 2 shows the month-on-month percentage change, which again is small and doesn’t offer a lot of clarity in terms of marketing strategies.
If we are looking for upside at this time of year, we saw a strong rally in SRW in October last year, some of which was held moving into harvest. We saw a similar trend in 2020 when prices gained $50 through our spring. Importantly for wheat growers, it’s rare to have prices fall at this time of year, when prices are already considered to be quite weak.
In terms of basis, the general trend is for it to weaken as we approach harvest. When the crop is failing, it can have extreme rallies, but looking at production forecasts, this doesn’t look like the case this year.
What does it mean?
Historical probabilities suggest that SRW prices will improve over the coming month, albeit marginally, and should come into harvest at better prices than we see today. The Basis is likely to weaken with harvest, however, which could negate any gains in international markets.
Key Points
- Over the long term, US wheat prices tend to be lowest at harvest and highest in March.
- The difference between high and lows are small compared to often volatile markets.
- Any improvement in price thanks to US values might be negated by local pressure.
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Data sources: CME, ABS, Mecardo
