Chicago Board of Trade wheat futures remain volatile as concerns about the Russian/Ukraine situation continue to bubble along, against an overall global balance sheet that threatens to see global and United States stock estimates increased again in this month's US Department of Agriculture Report. That will become clearer later this week.
So far the market has shown no inclination to push below the January lows. We saw a rally that took out the December high, but since then the market has trended sharply lower. However, the market staged a recovery last Friday night, rather than pushing down to test the January lows.
While tensions remain in the Black Sea it is hard to see the market giving up its risk premiums. If that view is correct, then we have a stalemate, where supply and demand fundamentals probably should see prices drifting lower, while the risk to the flow of Black Sea exports works in the opposite direction.
In SA, we are seeing opportunities to offload old season wheat at good prices within $10 a tonne of $400/t port basis. That is not every day, but often enough for those growers wanting to sell before storage fees begin to accumulate.
Elsewhere the market is not as attractive. For example, some traders are only offering up to $358/t delivered Kwinana in WA, with $320/t being the traded price for ASW on Clear Grain Exchange.
We should also be seeing good opportunities to make forward sales for the 2022/23 crop. Reasonable prices may well be out there, but those most easily seen in public forums are unattractive at around $340/t delivered port.
That is implying a basis of -$A60/t, which is very weak. Even if basis remains weak for another year, we would not expect to see it that weak at harvest time.
That leaves swaps and options as the best way of capturing the current market level to underpin prices for the coming season.
While many growers use March swaps, December swaps are just as good, if not better. They force a decision on exiting the swap position by late November. That coincides with harvest, when price management is due for another decision. That is either to exit the price risk by selling the grain, holding the grain but establishing new swaps if you think basis will improve, or simply holding the grain and speculating that prices will lift.
Alternatively put options could be a tool to use this year as well. While underpinning the downside, they will leave exposure to upside if prices spike on the back of the Black Sea situation, or if the 2022 global crop gets into trouble during the year.
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