A few weeks ago, I wrote about the attractive prices on offer for next harvest and the importance of keeping a close eye on them for selling opportunities. They have gotten better.
The first chart below shows the forward curve for Chicago futures. The market is currently in backwardation, where the forward market is trading at a discount to the spot futures. This is relatively unusual in the wheat market (see here). Typically the forward market offers a carry.
Regardless of the current carry situation, the market is at high levels. The December futures contract is at approx A$408/mt.
It is important to remember that this does not include basis, which has to be added or subtracted from the final return.
The second chart is the ASX Australian wheat contract vs Chicago. We can see that the basis on offer at present is negative. Historically, we only tend to have a negative basis during times of large production.
The market for physical grain in Australia for next year is offering a negative basis, as an example:
- Kwinana -A$40
- Adelaide -A$43
If locking in prices, it is essential to think in terms of the futures and basis component. If you sell a physical contract, you are locking in a negative basis level. If you lock in futures, you can price the basis at a later date.
If you lock in futures and basis returns to average levels, then that will provide a stronger return.