If you look at the price development of the French futures market Matif, you will see a sharp fall in wheat prices. Since the end of January, the share price has fallen by 10%. Nearly €30 write-down on the March contract. At the same time, physical wheat prices – the spot prices – show a very different picture. How is it possible that these prices move contrary?
The current situation in the market is backwardation named. In this case, the spot price (the physical price for immediate delivery) is higher than the price for delivery in the future (futures price). In this case, the March contract on the Matif, but also the one for delivery in May – the last contract for the 2021 harvest. This situation is positive for futures market participants. It means that they have mainly taken long positions.
Positive return
A law in the futures market shows that long positions lead to a positive return at constant prices. During the term of the futures contract, the spot and future prices are at the same level. After all, as the expiration date approaches, physical delivery takes place on the grain market. The futures price and spot price are then the same. In practice, physical delivery hardly happens. Contracts are 'rolled over' to the next delivery period and a new position is taken. An investment company or pension fund is not interested in wheat at all. At the same time, constant prices are also a utopia. These move every day, with the whims of sentiment.
The European grain futures market reacted strongly in the second half of January to the impending conflict between Ukraine - with the Western world behind it - and Russia. It allowed the futures contract for March delivery to spike above $290 per tonne. Once the worst of the cold had passed, confidence in the market quickly crumbled. A write-down of almost €30 per tonne of wheat is visible. On Thursday, February 10, the March contract closed at €261,50 per tonne. The price recovered again on Friday morning by around €3 per tonne.
The physical market
So much for the futures market. Then the spot market, the physical delivery prices. These also move with the futures market, but the effect of political tensions, for example, is muted. For example, the European feed wheat price has lost €19,50 per tonne since its peak at the end of January. It is trading at €277,50 per tonne this week. The regional fair prices in our country vary from €251 (Goes) to €274 (Groningen).
Please note: on the Paris futures market the futures price is for baking wheat with 11% protein percentage, a minimum hectoliter weight of 76 (at 15% moisture) and Hagberg of 220. Little baking and milling wheat is grown in the Netherlands. The majority is feed wheat. This explains why the price difference between the spot and futures market is not very large or, in the case of the Zeeland quotation, even lower than the futures market. This situation becomes in stock market terms contagion named. The futures price is higher than the spot price.
Baking wheat prices
We can go to Germany for a physical baking wheat price. This week the VdG raw materials exchange in Hamburg recorded a price of €275,25 for milling wheat with 12% protein. The price for feed wheat is €1,75 below that. The southwestern trade fair in Germany is slightly higher at €290 for baking wheat (11,5% protein). That price is also quoted in Mannheim. Feed wheat is slightly lower at €282 to €285. The malting barley price is also striking. It stands at €400 per tonne. These price levels have everything to do with a tight situation and disappointing quality of the 2021 harvest.
How is it possible that the futures market quotation deviates so much from the spot prices? Two reasons: European wheat is not competitive on the world market. Thanks to the high exchange rate of the euro – compared to the ruble and the US dollar – it is relatively expensive to buy wheat in France, for example. Fewer sales in the traditional North African markets are breaking up the EU. Even with an export tax, wheat from Russia is more attractive to purchase. Especially after quality requirements have been relaxed by importing countries.
Another reason is that importing countries are increasingly postponing their purchasing policies. Stockpiling is done as little as possible with expensive wheat. In the hope that prices will be lower next season, they will postpone wheat purchases to the end of the current season. Only what is purely necessary is purchased. That takes the biggest appetite out of the market.
Opportunities for new harvest
At the same time, this behavior pushes up the price of the new harvest. It closed in Paris on Thursday at €252,50 (delivery in September). A relatively small difference of €10 per ton compared to the March contract. Looking at a multi-year average – just over €190 per ton – that is a relatively high price. As a grain grower, it offers excellent opportunities to hedge your bets now. Most arable farmers are not active on the grain futures market themselves, but hedging with a cooperative or other buyer is also possible. They do apply a discount on the futures market quotation, which is usually €15 to €20 per tonne. This already puts a floor in the wheat balance. Important given the rising costs.
Whether the 2022-2023 season justifies this above-average price level is anyone's guess. We know that worldwide the areas of wheat hardly move upwards. This is not the case in the EU and arable farmers in the Black Sea region are also more likely to opt for alternative crops. More winter wheat has been sown in the US, but extreme drought tempers expectations. That is also a barrier to spring wheat in the northern US and Canada.
More wheat, falling prices?
Currently, the world wheat harvest is expected to remain unchanged, amounting to 777 million tons according to the most recent estimates. That is 775 million tons this season. In addition, demand for feed wheat in the US and EU is falling, giving rise to the idea that prices will fall in 2022-23. The average price level is estimated to remain higher than average, to compensate for the costs of more expensive fertilizer and labor. Please note: this is based on an average harvest. Ultimately, the growing season determines the yield, not the acreage. Anything can happen: frost damage, drought, precipitation. In that light, a wheat price above €250 per ton is not so bad in the long term.