Following record wheat prices in 2008, world wheat stocks have been rebuilt to relatively comfortable levels. Another above average crop this year, would see stocks rise again to what could be considered relatively burdensome levels.
This situation is very similar to the late 1990’s when Chicago Board of Trade (CBOT) wheat futures made major highs in early 1996 and growers around the world responded by increasing production and creating a stocks hangover for the period through to early 2002.
In 1996 prices fell rapidly from their peak. A period of relative volatility followed for the next 1-2yrs until prices settled into a trading range of less than $1/bu until the next major rally in 2002.
Thus far, in the recent phase the market topped out in February 2008 and fell rapidly before rallying again in August 2008 before easing and making new lows in December 2008. Since there has been a series of failed rallies after which prices again fell to test the lows of the current price cycle. Lots of coincidence?
We are not saying that the market is going to flat-line for the next 5yrs - in many ways the market has changed significantly since the late 1990s.
The lesson learnt in the 1990s was that hedging using futures early in the year proved the most effective marketing method in a comfortable stocks environment. While prices early in the year were not stellar, they proved to be better than those later in the year.
If we repeat history for at least this year (flat prices as a result of heavy carryover stocks) then the forward carry currently embedded in CBOT December futures will eventually evaporate. Currently CBOT December 2010 swaps are trading at A$230/t vs March 2010 CBOT swaps at A$198/t.
Although it may seem defensive, we suspect hedging on early rallies (prior to Mid April) will be a winner this year. In a flat price scenario, this strategy will allow you to; capture the futures carry, pick-up the forward points in the currency and hopefully capture stronger basis later in the marketing year.
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