We normally think of managed funds as the “smart money”, but sometimes they do get it wrong. Last week was a prime example. The funds were caught out with sizable short positions on wheat, as the market surged higher on the outbreak of war in Ukraine.
The opportunity in the roller coaster ride that is the commodity market, especially grain markets right now, is for grain consumers. As we have seen over the last fortnight, wheat markets are heavily sold and are therefore primed for sharp rallies on bad news.
The US winter wheat harvest is underway, which usually sees prices bounce along sideways, or soften as harvest pressure overwhelms demand. The start/stop conflicts in the Middle East, along with uncertainty around spring crop conditions in the Black Sea region, have seen wheat prices rally strongly, and fall on the ceasefire.
Figure 1 shows that the spot wheat contract is now again nearing lows, which in US terms are at key support levels of 525¢/bu. In our terms, this equates to the spot Soft Red Wheat (SRW) contract trading at $290/t.
ASX Wheat futures have held their ground, not rising on the rally, and not really falling either. Locally, markets seem happy with the price around $330/t and want to see sustained moves in international markets before shifting prices significantly.
The opportunity for grain consumers is to buy SRW wheat futures or swaps while they are bouncing along at weaker levels. When prices are historically low, it makes sense that further downside is limited. For wheat prices to continue to ease, big crops would have to be harvested in major exporting nations and be followed by a big corn crop.
While stronger supplies are possible, there will be resistance to selling and shifting sowing patterns in the New Year, as growers baulk at lower prices.
We have recently seen how easily prices can rally on perceived supply threats. Real supply threats caused by dry weather or a wet harvest would see a sustained price rally.
History tells us that at some stage there will be a significant crop failure somewhere over the coming year, and grain consumption has never been stronger (Figure 2).
What does it mean?
Buying SRW futures or swaps in a weak market might cost a little as prices bounce along the bottom of the range. However, having a position will offer great peace of mind in the knowledge that future prices are somewhat protected from left field events causing sharp price swings.
Key Points
- Grain prices have fallen after the ceasefire was declared between Israel and Iran.
- SRW is now back at lows, with wheat supplies seemingly adequate.
- Consumers can buy futures to protect against price rallies, with little downside risk.
Click on figure to expand
Click on figure to expand
Data sources: CME, ASX, Mecardo, USDA, Bloomberg
