Market Morsel: A relationship breakup can hurt.

| 27th April 2022 | By Andrew Whitelaw

Market Morsel

We talk a lot about protecting risk. At times we talk about futures as a tool for mitigating price risk. In wheat, we might look toward CBOT, ASX or Matif futures. In Canola, it’s MATIF or ICE futures. Barley has always been a harder task.

I wrote about proxy hedges and the relationships between barley and alternate commodities, such as corn and wheat, in late October. The result was that ASX wheat had a much stronger relationship with Australian barley prices than CBOT corn futures. You can read that analysis here.

The relationships between commodities do change, and subscribers have asked us some interesting questions about the recent close relationships between Australian barley and corn in recent days.

In recent weeks, corn futures and barley prices have experienced a closer relationship than usual. Is this the new, new?

The first chart below shows the correlation (1 = perfect relationship, 0 no relationship) of corn and feed barley as a rolling 11-week correlation. What we can see is that corn and barley have a troubled relationship. It has held a solid correlation at times, even higher than the present, but it can revert very quickly to having a negative relationship.

The second chart below shows the same, but between ASX wheat and F1 barley. We can see in this chart that the two pairs have a more healthy relationship and have consistently had a closer relationship, including at present.

The third chart shows the 11-week correlation between feed barley and various futures markets. As we can see, the correlation with ASX is the strongest. The chart also shows the correlation of returns which is a statistically more valid way of calculating, especially for short time frames. We can see that all the wheat contracts have a significantly more substantial relationship in terms of returns.

The data shows that the corn market follows similar patterns to the past. The fortunes of corn and barley are bonded at present, albeit from price correlations, not the more statistically more significant returns. The current close relationship between corn and barley could break down quicker than a summer romance.

Also, remember when hedging using proxy hedges, there is a significant risk.


  • Barley
  • Corn