Forward sellers must stay in the market

Forward sellers must stay in the market

ANALYSIS
Cropping
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Those who forward sold in 2021 should make another round of forward sales for 2022.

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Anyone who forward sold wheat this year with either swaps or physical forward sales has been left behind.

The last time we saw similar market moves was in 2007, and there were some important lessons learnt back then. The main one was to keep forward selling for the following year.

It makes no sense to stop forward selling when prices are at record highs. Growers who stayed in the market by forward selling their 2008 crop, found that the high prices they had missed out on in 2007 were more than covered by the prices they achieved for the following crop.

Using wheat swaps as an example, growers were actively selling wheat at prices of $A320 to $360 a tonne in April and May this year. Further sales may have been made in August at prices of $A360 to $A380/t.

Those sold swaps are now being bought back at around $420/t. Losses from $40 to $100/t are being incurred. Those who forward sold physical wheat at $300 to $325/t are falling short of current prices by as much as $70 to $100/t in SA and WA, and $40 to $50/t in the eastern states.

The factors that have driven these losses are international in origin, and they are built into both the current market, and the forward market for 2022/23. For example, the $A value of December 2021 futures ended last week at $A417.86/t. The $A value of December 2022 futures closed the week at $A421.54.

With wheat swaps at least, there is already the opportunity to forward price the 2022 crop at $A price levels which, in international markets, have only ever been exceeded on 15 trading days back in 2008. These are near record prices.

In 2022 we would expect two things to happen. Firstly, we would expect the season to revert to normal in countries adversely impacted by severe drought in 2021. Secondly, high prices fix high prices, and we would expect the global acreage planted to wheat to expand in response to current price levels.

Global wheat production should rebound in 2022, with prices ending the year lower than current levels.

For those who forward sold in 2021, the lesson learnt from 2007/08 is to make another round of forward sales for 2022. If these prices get left behind in the end, forward sales will be needed again in 2023.

Eventually anyone who has missed out on high prices this year will capture those prices, but simply a year later than those who have not forward sold at all. But you have to stay in the market.

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