CBOT wheat not reflecting global values

CBOT wheat has traditionally been used as the dominant price indicator representing global values. This stems from the United States previously being the world's largest wheat exporter.

In the early 1980s the US was responsible for as much as half of the world's total wheat exports.

This means the price of grain in the US was historically a major determining factor of the prices wheat traded in other parts of the world.

The resulting price relationship enabled anyone trading wheat internationally to use CBOT wheat futures to manage their price risk through hedging.

When a buyer purchases Australian grain from growers, they take on the risk of the grain's price going up or down in the time between buying the grain and selling the grain.

To mitigate the risk, most buyers will sell the same amount of grain they have bought on a futures market such as CBOT to "hedge" their price risk.

CBOT wheat futures have remained a major hedging tool for buyers and sellers in global markets.

This inherently means there remains a price correlation between CBOT wheat and Australian wheat prices.

However, the US is no longer the dominant world wheat exporter with its share of total global wheat exports reducing to about 10-15 per cent.

Black Sea countries have become the dominant world supplier, Europe is now a larger exporter, and Canada and Australia have remained relatively stable as a percentage of total global exports.

If we consider crop conditions this year, the pick of the bunch from the top global wheat exporters is North America.

US crop conditions are reported average to better than average as winter wheat harvest progresses.

CBOT wheat has now lost almost all the gains made since news of deteriorating conditions in Russia began to see estimates of its wheat crop decline.

Production estimates of the Russian crop have not improved and remain at the low point of 80 million tonnes as its winter wheat harvest gets under way.

There are now also reports that India is set to lower its wheat import tariff to enable wheat imports, which would add additional demand to an already tight global wheat balance sheet.

This suggests the recent dramatic fall in CBOT wheat futures may be more indicative of the US domestic market currently than global values.

Australian growers should take this into consideration when determining what their grain is worth and then offer their price to the market.