CHICAGO Board of Trade (CBoT) wheat futures have somewhat disconnected from other major global agri futures markets.
This is in large part due to the significant short position now held by the fund managers in CBoT wheat.
Apologies for the jargon, let me explain further.
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CBoT wheat futures are a liquid and highly accessible contract that can be bought and sold by many types of market participants, beyond just growers, end-users and traders of physical grain.
These participants include fund managers or speculators that are ultimately trying to make money out of the price of CBoT wheat going up or down.
According to Profarmer Australia, the speculators currently have the largest "net short" position in CBoT wheat since 2018.
This means they have a large 'bet' in place that CBoT wheat prices will go down.
The bet can be a self-fulfilling cycle.
Speculators think prices will go down, so they sell contracts putting more downward pressure on prices.
So, what's driving the large net short position in CBoT wheat?
It could be as simple as speculators taking a view that "high prices typically cure high prices" in agri commodities because growers are able to plant more.
It could also be that they feel comfortable placing bets in CBoT markets and to date the bet has been working, which may be creating a herd mentality.
It's important to note however, that just as a large net sold position implies that speculators make money if the price goes down, it also implies that they lose money if prices go up.
This makes CBoT wheat susceptible to a quick buy back of these positions if speculators change their view, often referred to as a "short covering rally".
This is what happened on Friday night on the back of rumours Russia may slow the pace of exports to boost prices.
The northern hemisphere spring is still ahead of us.
Winter crops have been under snow and have a lot of growing to do and spring crops are still to be planted.
There is a long way to go before global supplies are assured and at this stage the United States Department of Agriculture is forecasting global stocks-to-use to tighten year-on-year.
The large net short position seems to be a risky bet in my view, but I may be biased towards wanting higher prices.
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Australian wheat prices trading on Clear Grain Exchange have generally held versus the fall in CBoT wheat.
APW1 wheat traded $404/t Brisbane, $400/t Kwinana, $396/t Melbourne, and $378/t Pt Adelaide.
ASW1 was trading $387/t Pt Adelaide, $378/t Melbourne and $365/t Esperance as examples.
H2 was $425/t Newcastle, $405/t Melbourne and $400/t Esperance.
CBoT wheat shouldn't be used as the only indicator of global wheat prices.
- For more information or to see what values are trading contact Clear Grain Exchange on 1800 000 410 or email support@cgx.com.au