The price of everything is seemingly rising. For those in livestock feeding industries freight and energy costs will be biting at margins, but the main input is grain for feed. The concern around grain prices rising too is well founded, but there is at least something that can be done to protect against it.
Wheat prices have rallied from the lows seen in February, obviously assisted by rising oil prices, but the gains have only been in the order of 10% (figure 1). Compare that to Crude Oil, which has rallied 54% over the same period, and the wheat gains seem minor.
Wheat rallied much more during the last oil price spike, but that was because major exporters Russia and Ukraine were involved. This time there is no real risk to wheat supply, at least in the short term in the US. The supply risk in wheat this time is more medium and long term, as rising costs of production see plantings decline in more marginal country and production falls.
The US winter wheat crop is in the ground, while spring crops are being planted. We’ll have to wait for the April WASDE to get some picture of how increased costs in the US and other Northern Hemisphere grain oilseed exporters have impacted spring plantings. Even then numbers will be rubbery.
Locally there is still plenty of grain in Australia, and while prices have rallied, they are not strong enough to see sellers rushing to lock in new crop prices. Croppers will be recalculating budgets, and taking some ground out of production, but we can still expect production to be at exportable surplus levels at this stage.
While fuel and energy costs are hard to hedge, grain inputs can be managed with forward contracts, futures or swaps. Figure 2 shows the forward curve for CME Soft Red Wheat (SRW) futures. Future wheat prices are basically at the cost of carry, so the equivalent of buying physical wheat now and storing it.
ASX Wheat Futures, are deliverable locally, and cover against prices rises caused by local supply issues, as well as international problems. ASX Wheat for Jan-27 is current priced at $362/t, which is within a normal range for the local premium to CME.
Options are also a viable tool for managing price increases. Call Options are like price insurance, where a premium is paid to lock in a buy (strike) price. If the market rallies through the strike price, the holder can convert their option to a futures price and collect the gains. These gains offset price rises in physical grain.
What does it mean?
Wheat prices for next season are back somewhere near the strongest levels of 2023 and 2024 and are a long way off the peak values of 2022. This crisis look like it will cause a slow appreciation in prices, rather than a rapid peak, but the upside risk remains, and it is something than can be managed.
Key Points
- Grain prices have increased but are still within the range of the last three years.
- Forward and futures pricing can be used to manage price for new crop grain.
- Financial tools are a good way of managing price risk without taking physical grain.
Click on figure to expand
Click on figure to expand
Data sources: MLA, Reuters, WASDE, CME, Mecardo
