# Wheat futures



## thommo (24 September 2007)

I have a fairly general question regarding wheat futures and the wheat market.

With and understanding of the effects of carry costs and convenience yields, I have a grasp (just) on the idea of backwardation and contango. These concepts seem easiest to understand when one ignores the cyclical nature of the underling and assumes constant demand and supply over a period. (oil seems a commonly used example although I appreciate the demand cycles and volatility)

Where I am struggling is applying this theory to the wheat market which is obviously fairly cyclical. At the moment there seems to be a large degree of backwardation in the wheat futures market potentially giving a large positive carry and I guess some downside protection to a fall in the price of wheat. Is this all due to the supply nature of the crop? Can I feasibly roll into the next contract each month taking that yield?

If someone is has knowledge in this area and has time to fill in the gaps and the risks of this sort of thinking with a cyclical crop. Or correct anything I have posted.

Also if anyone knows where to get a good global annual demand and supply chart showing the calendar months of peak demand and supply it would be much appreciated. 

Thanks in advance for any feedback.


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## wayneL (24 September 2007)

thommo said:


> I have a fairly general question regarding wheat futures and the wheat market.
> 
> With and understanding of the effects of carry costs and convenience yields, I have a grasp (just) on the idea of backwardation and contango. These concepts seem easiest to understand when one ignores the cyclical nature of the underling and assumes constant demand and supply over a period. (oil seems a commonly used example although I appreciate the demand cycles and volatility)
> 
> ...



thommo,

By no means an expert on this but a couple of thoughts on this.

* If you notice the Dec/Mar contracts are in contango, so if trading from spot to spot, there will be no positive carry. There is only backwardation in the contracts after that.

* The current wheat price is the result of severe supply interruptions. i.e drought in Oz and the US crop damaged by frosts and adverse weather. Whether this supply problem is ameliorated in the next growing seasons, nobody knows, so it would seem unreasonable for hedgers to lock in $8 or $9 now for late '08 and '09 deliveries. So basically there is a lack of buying demand for deferred contracts... sheer gamble territory.

Have a look at a long term chart to see what can happen to demand.


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## KIWIKARLOS (24 September 2007)

I like the look of wheat as an investment but im concerned that now El nino is broken and La nina is forming we will have to wait and see if the La nina is good enough to be drought breaking (which i hope it is). If it keeps strengthening we could be in for good rain and then presumably good wheat crops and I assume this could drive down prices?


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## michael_selway (25 September 2007)

wayneL said:


> thommo,
> 
> By no means an expert on this but a couple of thoughts on this.
> 
> ...




Do you know a good site for current Wheat Prices and historical price charts?

And maybe also other agricultural commodities?

thx

MS


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## thommo (25 September 2007)

Gooday Wayne, I might drill you for a little more information and confirm my understanding of your thoughts if you don't mind.

Yeah you are right actually, the DEC MAR contracts are in Contango. Thanks for that.

Just to clarify, the DEC MAR pricing is at this point a function of expectations of current crop yields which have come under some pressure due to the weather and competition from alternatives such as corn. (biofuel story)

Assuming then that DEC to MAR is when the majority of harvesting is complete, investors and otherwise are taking a view that yields are going to be far lower then expected and hence the spot price will track upward toward the futures price as we approach maturity. 

Beyond these two contracts, nobody is willing to speculate not only a) what sort of Winter Crop (depending on what part of the world you are in) will be planted and b) what sort of yields can be expected. This lack of information is the driver of the backwardation effects seen in the longer dated futures.

Does that sound like a reasonable summation? 

Michael, 

http://www.cbot.com/cbot/pub/page/0,3181,1322,00.html

the above is where i have been looking at quotes plus on CMC via the CFD charts.

Thanks guys


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## wayneL (25 September 2007)

michael_selway said:


> Do you know a good site for current Wheat Prices and historical price charts?
> 
> And maybe also other agricultural commodities?
> 
> ...



www.futuresource.com or www.quote.com

Futuresource is probably easier to use if you don't know the ticker symbols etc. but they are both owned by the same company so pretty similar. Give me a hoy if any problems figuring it out.


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## wayneL (25 September 2007)

thommo said:


> Gooday Wayne, I might drill you for a little more information and confirm my understanding of your thoughts if you don't mind.
> 
> Yeah you are right actually, the DEC MAR contracts are in Contango. Thanks for that.
> 
> ...



That about sums it up. The caveat being, as stated before, I am in no way an expert on supply/demand pressures and there could be other factors as well.

Cheers


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## Bush Trader (28 September 2007)

wayneL said:


> That about sums it up. The caveat being, as stated before, I am in no way an expert on supply/demand pressures and there could be other factors as well.
> 
> Cheers




A lot of farmers are having to wash out forward phisical contracts, wheat swaps and futures contracts.  Not to mention that phisical forwards are usually hedged in the futures market.  So the whole blood thing is a mess.  I know a block that tore up $350,000 and only had 30% of his crop locked in.  Import parity is about $425 port if you take the US dec futures into account, so being as over heated as it is it could correct.  November will be the telling  month when the heders are well under way with harvest in the north

Cheers


BT


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## michael_selway (28 September 2007)

wayneL said:


> www.futuresource.com or www.quote.com
> 
> Futuresource is probably easier to use if you don't know the ticker symbols etc. but they are both owned by the same company so pretty similar. Give me a hoy if any problems figuring it out.




Ok thanks, btw are there any "wheat stocks" out there besides, AWB, GNC, etc

*AWB - Earnings and Dividends Forecast (cents per share) 
2006 2007 2008 2009 
EPS 21.0 15.1 20.7 24.8 
DPS 20.0 8.0 12.0 16.0 

GNC - Earnings and Dividends Forecast (cents per share) 
2006 2007 2008 2009 
EPS 76.3 -33.4 41.9 68.4 
DPS 50.0 10.0 29.0 48.0 *

thx

MS


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## thommo (1 October 2007)

Hi BT, thanks for your thoughts. I might just see if you can elaborate a little on the lingo. "wash out of fowards" implying farmers are having to cover hedges originally taken out because of potential downside of harvest no's.

I know a block that tore up $350,000 and only had 30% of his crop locked in?

Import parity is about $425 port if you take the US dec futures into account?

yeah the next couple of months will be interesting actually. 

Thanks alot for your patience.

Cheers 
thom


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## thommo (1 October 2007)

Thanks wayne, that is a good site. 

if anyone has any feedback on the wheat/corn differential i would like to hear it. perhaps short DEC wheat long DEC Corn. see chart below


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## The Once-ler (1 October 2007)

michael_selway said:


> are there any "wheat stocks" out there besides, AWB, GNC, etc
> 
> MS





AWB and GNC handle wheat, but they don't have any corelation with wheat prices, and if anything it's an inverse relationship. Look at wheat prices and charts of these companies to see that.

There is basically nothing on the borse that gives exposure to rising grain prices. There is a massive hole there that needs to be filled from managed fund type things so average people can get some exposure. At current grain prices there is plenty of money to be made.

High rainfall grain growing, or high quality soil arable land is pretty much a sure thing I reckon. Probly best to avoid the more marginable stuff.


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## wayneL (17 December 2007)

Wheat cracks $10 USD for the first time ever in the wee hours of Chicago AM on the electro market.

We'll all be getting mortgages on a loaf of bread soon.  Gluten intolerance will be a virtue. lol

I'm going to start hiding loaves of bread in the walls instead of Krugs


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## chops_a_must (17 December 2007)

wayneL said:


> Wheat cracks $10 USD for the first time ever in the wee hours of Chicago AM on the electro market.
> 
> We'll all be getting mortgages on a loaf of bread soon.  Gluten intolerance will be a virtue. lol
> 
> I'm going to start hiding loaves of bread in the walls instead of Krugs




That gap through resistance is pretty telling... Fantastic chart for trend trades by the looks.


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## numbercruncher (17 December 2007)

How will the Worlds rich afford to feed the worlds poor if they cant afford to feed themselves first ?


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## ithatheekret (17 December 2007)

I wonder what the volatility number comes out at with this bounce in Dec. price .


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## wayneL (17 December 2007)

ithatheekret said:


> I wonder what the volatility number comes out at with this bounce in Dec. price .



Fridays weighted IV average was 39%. Not the highest it's been in the last 24 months (at ~55%), but it is rising.


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## ithatheekret (17 December 2007)

Thanks Wayne .


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## dj_420 (17 December 2007)

wayneL said:


> Wheat cracks $10 USD for the first time ever in the wee hours of Chicago AM on the electro market.
> 
> We'll all be getting mortgages on a loaf of bread soon.  Gluten intolerance will be a virtue. lol
> 
> I'm going to start hiding loaves of bread in the walls instead of Krugs




Are you long on wheat wayne? I am looking for a long entry on any sort of decent pull back.


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## wayneL (17 December 2007)

dj_420 said:


> Are you long on wheat wayne? I am looking for a long entry on any sort of decent pull back.



Unfortunately no.


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## ithatheekret (7 January 2008)

Just the latest updated chart for CW38


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## wayneL (8 February 2008)

Anyone know a good mortgage broker? I'm looking to get a loan for my next loaf of bread. 



> US wheat prices keep on rising
> 
> Thursday, 07/02/2008
> 
> ...


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## numbercruncher (9 February 2008)

Keeps on going !



> Feb. 8 (Bloomberg) -- Wheat rose to a record for a third day on the Chicago Board of Trade as the U.S. forecast its lowest inventories in 60 years.
> 
> Wheat futures for March delivery rose 30 cents, or 2.8 percent, to a record $10.93 a bushel on the Chicago Board of Trade. The contract rose the 30-cent exchange limit for five straight days. The 16 percent gain this week is the biggest in history.





http://www.bloomberg.com/apps/news?pid=20601087&sid=aTrp83Ld88ds&refer=home


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## exgeo (9 February 2008)

> Ok thanks, btw are there any "wheat stocks" out there besides, AWB, GNC, etc




If you are able to buy UK-listed stocks then you can look at the ETF's from http://www.etfsecurities.com/en/securities/etfs_securities.asp

You can either buy a basket with all the grains, or pick the individual securites you want. I believe there are similar US-listed products as well.


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## michael_selway (9 February 2008)

exgeo said:


> If you are able to buy UK-listed stocks then you can look at the ETF's from http://www.etfsecurities.com/en/securities/etfs_securities.asp
> 
> You can either buy a basket with all the grains, or pick the individual securites you want. I believe there are similar US-listed products as well.




Ok thanks, SHV & IPL are interesting stocks as well

*Date: 8/2/2008 
Author: Paul Garvey 
Source: The Australian Financial Review --- Page: 66 
Australian-listed Select Harvests has recorded a 2007-08 interim net profit of$A9.1m, down $A4m. The ongoing drought conditions caused losses due to risingwater charges and by forcing the almond growing business to hold off on plantingnew orchards. However, Select Harvests has maintained its dividend for thehalf-year at $A0.22. The performance should pick up in the second six months, asthis is the period in which the actual almond harvesting falls. On 7 February2008, the stock closed $A0.25 higher at $A7 

Date: 7/2/2008 
Author: Tracy Lee 
Source: The Australian Financial Review --- Page: 8 
 Australian-listed agricultural fertiliser group Incitec Pivot has enjoyed stronggrowth in recent years. The stock is now trading above $A100, and the mostbullish analysts expect it to rise to around $A148. Much of Incitec Pivot'ssuccess has stemmed from its decision to focus on manufacturing rather than thedistribution of fertilisers. Manufacturing now accounts for more than 80 percent of Incitec's earnings, while the acquisition of Southern CrossFertilisers has allowed it to capitalise on the surging price of ammoniumphosphate. Meanwhile, an efficiency program known as Tardis has significantlyexceeded Incitec's expectations in terms of cost savings *


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## Buffettology (9 February 2008)

wayneL said:


> Anyone know a good mortgage broker? I'm looking to get a loan for my next loaf of bread.




.............................................................................................................................................................................................................


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## wayneL (10 February 2008)

A bit of context:

Chicago wheat for the last 15 years. 




Minneapolis wheat is even higher  @ >$15 

http://futuresource.quote.com/charts/charts.jsp?s=MW&o=&a=M&z=610x300&d=medium&b=bar&st=

**** gold, food is where it's all at.


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## ithatheekret (10 February 2008)

It has me wondering which hedgers have been caught out on this run in price , I'm sure there will be a few positions in that run up that have been forced to cover  , adding to the price rise . Been some good money made in this run too and now news is drifting around of Iraq wheat shipments resuming .


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## chops_a_must (15 February 2008)

Wheat showing some phenomenal relative strength once again. Another runaway gap.

Could you expect to see it hold 4.75% for the rest of the night, could you? 

You really wonder at what price the physical sellers will begin to accept. If it's at 1500 on one market, and just over 1000 on another, no reason why they wont at some point meet, likely higher.

Ag plays are going to become the next nicklers and zincors if this keeps up.


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## ithatheekret (15 February 2008)

Pull up the lawn and plant wheat Chops .


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## chops_a_must (20 February 2008)

ithatheekret said:


> Pull up the lawn and plant wheat Chops .




Nah... our goat got rid of all the wheat grass from our front lawn a few weeks back. Should have sold it!


Looks like a lot of runaway gaps on all things soft commods tonight. A blue sky breakout on the crop indexes by the looks, can anyone confirm that?

Waiting to see what POT does up against that all time high, before I take a pot shot.


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## chops_a_must (27 February 2008)

How's this as a volatile market?

Up 3% on open, down to scratch, up 8% in 45 minutes. Insane. The really bad news for bakers and the like is that the back months are really coming along as well. The volume on the near term contracts has grown a staggering amount.


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## wayneL (27 February 2008)

chops_a_must said:


> How's this as a volatile market?
> 
> Up 3% on open, down to scratch, up 8% in 45 minutes. Insane. The really bad news for bakers and the like is that the back months are really coming along as well. The volume on the near term contracts has grown a staggering amount.



The housing ladder is dead, get on the loaf ladder before it's too late.

It's easy! Mortgage yourself to the hilt to buy your first Tip Top half loaf... by the time you die you could own a full wholemeal granary loaf, perhaps two. 

Unreal, exciting, disturbing, historic. 

The world is changing.


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## wayneL (27 February 2008)

Just as s side note that demonstrates how things have changed. 

A few weeks ago 30c was the one day price limit in Chicago wheat. It is now 90c...

Gold is the poor man's commodity! LOL

Gold moves from ~$250 => ~$950 and takes 7 years.

Wheat moves from ~$2.90 => ~$12.00 in about *2 years*.

(Just wish I could brag about being on it all that time. )


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## wayneL (27 February 2008)

Bloomin' 'eck!

Minneapolis wheat has seen a high of ~$25!!


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## chops_a_must (28 February 2008)

wayneL said:


> Bloomin' 'eck!
> 
> Minneapolis wheat has seen a high of ~$25!!




Can you tell me why there would be such a huge difference between the markets in the same country?

Anyway, just in case you haven't had enough of the crazies... Limit up yesterday... effectively limit down on open tonight. Absolute insanity. Enjoy:


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## wayneL (28 February 2008)

chops_a_must said:


> Can you tell me why there would be such a huge difference between the markets in the same country?
> 
> Anyway, just in case you haven't had enough of the crazies... Limit up yesterday... effectively limit down on open tonight. Absolute insanity. Enjoy:




Chicago Deliverable Grades
No. 2 Soft Red Winter, No. 2 Hard Red Winter, No. 2 Dark Northern Spring, and No. 2 Northern Spring at par; No. 1 Soft Red Winter, No. 1 Hard Red Winter, No. 1 Dark Northern Spring and No. 1 Northern Spring at 3 cents per bushel over contract price.

Minneapolis Deliverable Grades: 
No. 2 or better Northern Spring Wheat with a protein content of 13.5% or higher, with 13% protein deliverable at a discount.

Minneapolis wheat is of a more specific (higher protein?) grade and is probably the particular grade most damaged by adverse weather... at a guess.


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