Written by: Jerome Critch | Grain Marketing Advisor, Director of Planfarm Marketing | 0488 404 848
Written 17th March 2023
If you are holding 2023 wheat swaps and are wondering when to roll them in to cash contracts this article is for you. If you are wondering what the hell that all means then this article is hopefully still worth a read. Please remember advice is general in nature and markets change very quickly. Just over one year ago Russia invaded Ukraine commencing a brutal and bloody conflict in Europe that is still showing no signs of ending. Not only did this shock the world as the idea of a war in Europe in the 21st century seemed unimaginable, it is also shocked many markets, in particular the wheat market. Conflict in the Black Sea region combined with heavy sanctions on Russia took roughly 1/3 of the world’s tradeable wheat out off the market almost overnight. This sent grain prices rocketing and lead to a period of massive global food insecurity, particularly for those reliant on Black Sea grain to feed their people, such as North Africa and the Middle East.
Figure 1: May23 contract for CBOT wheat in US c/bu (April 2021 to March 2023)
Since then, grain markets have ebbed and flowed with changes in the conflict and the associated Black Sea grain agreement, which has enabled grain to continue flowing out of Russia and Ukraine despite the ongoing conflict. At the moment, grain traders and buyers all seem very comfortable with the current arrangements. CBOT wheat futures are around 18 months lows with May23 CBOT wheat currently just below 700 c/bu. Less than half the level they were 12 months ago when they spiked to more than 1,400 c/bu (figure 1).
So, my question is, how is it that global grain traders and international buyers are so comfortable at the moment and grain futures are relatively low despite the fact the war in Ukraine is still raging and neither side showing any signs of conceding? If anything, both sides seem to be getting reinforcements in preparation for spring offensives. The UN brokered Black Sea grain deal has just been extended but only for 60 days instead of the previous 120 day agreements. What does the grain trade know now that they didn’t know 12 months ago? (Insert puzzled face emoji).
One positive from the drop in grain futures is it has meant that wheat swap prices have come back sharply which gives those holding sold swap positions an ironical grin. Who would have guessed we would be barracking for swap prices to fall below $400! New crop cash prices have managed to hold close to or above $400 MG APW which means basis… wait for it…is actually positive. Yaaay! (see green lines and
stars in figures 2 and 3). This is despite WA and Australia producing back-to-back record crops. WA is still expected to be carrying a large surplus of grain from this shipping season into next shipping season. Depending on how you cut the numbers and how CBH go getting the grain out the ports, there will be around 8MMT of carryover. Assuming CBH’s long term agreement for shipping (which was recently
extended for another 12 months with little fanfare) is around 12 MMT, this means roughly 2/3 of the coming seasons LTA capacity can be met with old season grain. I.e. buyers holding LTA capacity are unlikely to be forced to chase grain over the next 18 months to fill their LTA slots, even if there is a large production drop in WA in 2023. The remaining roughly a6 MMT of CBH port capacity is known as first in first served (FIFS) and won’t be released by CBH until around July. If the season isn’t shaping up well then some of the FIFS capacity will not get taken up by exporters.
Figure 2. Time series graph of Kwinana APW1 basis over CBOT (January 2018 to March 2023).
Figure 3. Seasonal overlay graph of Kwinana APW1 basis over CBOT (January 2018 to March 2023).
What I am getting at here is it is hard to mount an argument that wheat basis for MGAPW in WA will skyrocket any time soon. There will always be a few exceptions such as fixed grade APW1, ANW1 or H2 in Kwi due to the recent low protein but on the whole it would be hard to imagine MGAPW basis above $30/tn and even that would take a pretty serious production hiccup in WA.
On the flip side, what is the downside risk for those holding swaps and looking to roll into cash contracts at some point between now and harvest. Well, we don’t need much reminding of where basis got to at the height of the grain price spike last year. Not to say this would happen again but it is the best we have to go on given the recent 12 months of madness.
So, upside potential for 2023 MGAPW basis is, call it, $30/tn. Downside risk is whatever your imagination and the graph on the next column suggest. A basic risk : reward analysis would suggest converting swaps to cash anywhere around $0 basis or better.
Figure 4. The chance of above median rainfall for April to June Source: BOM
For those who are in more marginal areas, have probably had little or no summer rain and are looking at a drier than average forecast (figure 4), this may mean taking on more production risk than you like in the form of physical cash contracts. If this is the case then have a discussion with your team to determine the best path for you. The key question will be, what are we more comfortable with; basis risk or production risk? I.e. What will cause the least amount of stress? The answer will most likely be somewhere in the middle, a compromise of basis risk and production risk.
If you need help or guidance with this discussion then feel free to contact one of the Planfarm Marketing team.