Article 10 February 2020
The grain markets are being driven by the weather headlines as harvest conditions for corn in the US and planting conditions for wheat in a number of regions bounce prices about depending on the forecast. Interestingly, historic price volatility has seen little reaction to the weather market and is muted relative to the expected fundamental outlook given historic averages. In this piece, we take a quick look at the wheat markets, recent weather events and the state of price volatility.
After hitting a nadir in 2016, global wheat markets have managed to move higher (figure 1), supported by drought in Europe in 2018 reducing harvests and falling US production. While impressive (72% up from the 2016 low), the 2018 price peak in the wheat markets was centered in Europe and did not last long with large crops in other regions, high global stock levels and a good outlook for coming harvests.
In the UK the AHDB’s milling wheat price topped out at £187.48/tonne in August 2018, only to fall 25% in just 13 months. With such a whiplash of prices in the past two seasons the recent weather-based headlines have garnered considerable interest; certainly from producers who undoubtedly would like the downward price trend to abate. While impossible to tell if the falling prices are poised to turn the recent rangebound market has given a moment of pause in the falling market.
The wheat fundamental outlook remains stable; the USDA’s forecast for the 2019/20 season (Jul/Jun) calls for global wheat stocks (ex-China), measured by a ratio of inventory to consumption, to remain nearly unchanged from the previous season (figure 2). Please note we have excluded China in these calculations as the nation hold major wheat stocks, but does not trade the grain in significant quantities.
Inventories of a grain generally move counter to price and to volatility; the more supply there is the lower the price and volatility, and stocks are a large part of the annual supply equation. In figure 2 and figure 3 we compare the USDA’s global stock figures (expressed as stocks to use) with the CBOT SRW front month price and the CBOT SRW historic volatility respectively. Empirically the connection between prices, stocks and volatility can be seen. Interesting with the volatility there has been a steady average since 2016 and this has not changed in the past season despite the lower stocks to use ratio. If weather is threating to make the stocks to use ratio smaller the realized volatility has not reflected this.
With weather comes concern about future production, though in the wheat market bearish an outlook can still be found quite easily as yields are continuously improving and demand remains unexciting. Currently, the historic volatility in the CBOT’s SRW contract is 19.3%, lower than short- and long-term averages (Table 1). This muted volatility seems disconnected from the weather headlines, and even from the USDA’s outlook, or perhaps the headlines are enough to incite a response from the markets.
Adverse weather conditions also slowed grain plantings in the US earlier in 2019. Grain prices started strong in 2020, but weather continues to be the big unknown for the upcoming planting and growing season. There are a wide range of tools available to help businesses exposed to grain markets manage this risk. Stable offers price protection contracts on a large number of grain indexes as a solution for producers and processors to mitigate the high levels of price volatility in specific markets.
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