A lot can change in 12 months. This time last year, 2016-17 forward contract wheat prices had just exceeded $300 a tonne, or more than $40/mt above what is being offered today.
But what has changed? A year ago the Australian dollar was about the same value as we see today, about 74 US cents. Estimated world wheat production and stocks on-hand were not largely different then to what they are today. The only difference is the weather.
The December 2016 wheat futures hit 620c/bu ($307/t) in July 2015, whereas they sit at about 480c/bu ($238/t) today. All of the talk 12 months ago was El Nino. Canada was experiencing some dry conditions, while the United States was a bit wet with the row crops of corn and soybeans futures increases dragging wheat along for the ride. Rainfall for June 2015 in SA was well below average as El Nino started to bite, and domestic prices hit their peak in July.
The December 2016 futures price of today – $238/t – is actually $20/t below the forward contract prices being offered at present. This is where basis comes in. The basis in this case is +$20/t, meaning the cash price being offered is $20/t above the theoretical price using the futures as the base.
Determining what is a good price for wheat is can be difficult. Graingrowers have a few ways to help decide whether a price is good or not.
Basis is one of method used in decision-making. If the basis is a positive amount then the price should be considered as better than it could be. Basis can fall into negative territory (although not often) therefore selling decisions should be made when basis is positive and the higher the positive number, the better the cash price on offer relative to the futures price.
Historical prices are also used as guide in determining whether the price being offered is good or not.
Deciles are a method of splitting up a large set of data (in this case historical best daily grain prices) into 10 equal subsets. It then gives an indication of how often a price has been higher or lower, based on the historical information.
For example, a decile 6 price means that six out of 10 times the price has been lower. A decile 2 price means that only two out of 10 times the price has been lower.
While price deciles are a good way to gauge where the today’s prices are in relation to the past, be wary as these are no indication of the chance for re-occurrence.
Wheat multi grade prices at Port Adelaide are moving between decile four ($233/t) and decile five ($260/t). Prices are just below the long-term average, but the longer term expectations are that prices could slip further. The fundamentals are showing no real weather issues in either hemisphere and world wheat stocks are still very high, leading us to believe that harvest prices will be lower than the present prices.
The times of $300/t wheat may be a distant memory for this year’s crop, but don’t let that memory cloud your judgement when considering forward sales. That price is decile 8 or above – in other words, the price will be lower than this at least eight times in 10.
Realistically, growers should be looking to make sales at any time when there is a small spike in the price. This way they are reducing the tonnage they have to sell at harvest, when in all likelihood the prices will be lower as harvest pressure kicks in.
Picking profit ahead of price is another way to stop the torture of trying to pick the highest price, because you generally won’t go broke selling your grain for a profit. To be successful at this you need to know when a price is profitable, which will vary from business to business. The only way to know this is to calculate how much it costs to produce each tonne of grain for each of your commodities. This will differ for individual businesses and is something that you may need to recheck at different times during the year as yield or costs change. Once you know the cost of production, you can then set a profit target and use this as a trigger for selling.
Hopefully these tools and ideas will help make grain sale decisions easier. Remember, look at the basis levels for each port zone, use price deciles to provide a reality check for present prices, choose profit ahead of price and don’t lose track of your grain sales in comparison to your estimated tonnages.
- Martin Beck is a grain marketing consultant with Rural Directions.