While growers don’t like to see wheat prices making new milestones to the downside, for consumers it can create opportunities. This is when grain consumers can protect their prices, managing values at what are now four-year lows.
The
northern hemisphere harvest, increasing corn and soybean crop prospects, weaker
demand, and improving southern hemisphere crop conditions are combining to give
the wheat market a decidedly bearish tone.
Figure 1
shows the latest dip in value has sent Chicago Soft Red Wheat (SRW) below $300
in our terms, moving down to $280/t.
Prices haven’t been this low since late in 2020, when we were going
through the first COVID-19 impacted harvest.
We know
from tracking world supply and demand that the supply situation isn’t really
one which should see wheat continue in a downward trend once the northern
hemisphere harvest has finished up.
There is
the spectre of a big corn crop to worry about, which could see feed values
weaken further. But we also know that
wheat costs of production have increased markedly since 2020, and further price
declines might see lower plantings over the coming year.
If we are
nearing the low, how can consumers take advantage of it without spending large
amounts of cash to tie up physical supplies?
Figure 2 shows the forward curve for SRW in Australian dollars per
tonne.
The SRW
forward curve is typical of times when prices are perceived to be low. The shape of the wheat forward curve is
basically the cost of carry, where the future price is the same as the cost of
buying physical and storing for that period of time.
While consumers
may baulk at buying futures at a premium to the spot price, we need to remember
that paying $325/t for wheat in January 2026 will still provide cheaper wheat
than any time in the past three years.
The risk
with using US-based futures to manage prices is a local drought, which sees
Australian prices move to a strong premium to SRW, with consumers not profiting
from futures to counteract price rises.
This risk
can be managed by using local futures prices, but ASX Wheat futures don’t trade
very well more than a year out. Ideally,
a SRW futures position would be sold and converted to an ASX position in the
first half of 2025.
What does it mean?
While grain consumers will enjoy seeing wheat values drift lower, the declines can only continue for so long before the market finds a base. There is still plenty that can go wrong in markets which could give prices a boost, so starting to manage new crop wheat prices using futures could be prudent.
Key Points
- Wheat prices have continued to decline, with SRW at a four-year low.
- Wheat futures are at a premium to spot, but only by the cost of carry.
- Consumers can start managing wheat prices at close to three-year lows.
Click on figure to expand
Click on figure to expand
Data sources: USDA, Nutrien, Mecardo
