During a workshop hosted by the Minneapolis Grain Exchange at Grainworld in Winnipeg, Darin Newsom, DTN Senior Analyst, suggested that if producers had time to visit just one chart daily for a snapshot of the market in order to get a Reader's Digest opinion, the forward curve for any given commodity is the one to watch. He commonly refers to this chart as the "markets view of fundamentals."
As seen on the attached chart, the forward curve is quite simply a chart which plots the value of each consecutive futures contract. For example, at the end of today's session, Minneapolis wheat for May closed at $8.13/bu., July closed at $8.12 3/4/bu., September closed at $8.13/bu., December at $8.21/bu. and March 2014 ended the session at $8.34/bu. These are the five points plotted on the chart to formulate the forward curve. Note that this represents a snapshot in time and these data points move continuously with the market.
Of significance is the slope of the line which attaches the points on the chart. An upward sloping line is a carry market, where each consecutive futures month trades at a higher level. This is viewed as a bearish market, as commercial entities that need the product cannot use it today, but would rather pay to have it stored for them. In the case of wheat, producers are presented incentives to hold product in their bins.
A downward sloping line indicates an inverted market and is viewed as a bullish scenario, where each consecutive contract trades higher than the one after it. In this situation, commercial users need the product and need it now. Spreads strengthen as nearby futures are bid higher, resulting in an incentive that will lead the producer to sell sooner.
As seen on the chart, the old crop portion of the forward curve is flat through September. This could be looked at in two ways. First of all, the February 24 version of this same chart, as presented at Grainworld, indicated an old crop curve which was extremely bearish and sloped upward at approximately a 45-degree angle. The wheat situation has become fundamentally more bullish in the sense that spreads have strengthened since mid-February.
The second manner in which this could be construed is that the market sentiment for hard red spring is neither bullish nor bearish, but neutral, as reflected by the actions within the market which impact futures spreads. Tomorrow's USDA report is much more likely to see corn or soybean data move the market in one way or the other, while wheat traders seem to be sitting on the fence with no real concern.
New crop futures are a different story, as seen in the upward sloping line from September through March. This is a carry market, or a bearish market, with no real sense of urgency on the part of the commercial trade to source needs based on current forecasts for a rebound in global production.
At present, the forward curves for both Chicago soft red winter and Kansas City hard red winter wheat tell a similar story. The winter wheat spreads have narrowed in recent weeks and may provide the earliest signs of concern as the extent of the damage to the crop, both from drought and frost, is more fully understood and works its way into the market.
Cliff Jamieson can be reached at firstname.lastname@example.org
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