ON JULY 4, 1776, the 13 colonies claimed their independence from England, an event which eventually led to the formation of the US.
Less than 72 years later, the Chicago Board of Trade (CBOT) was established to provide a centralised location where buyers and sellers could negotiate and formalise forward contracts.
The first contract, corn, was traded on March 31, 1851. This signalled the beginning of futures driven, price risk management for agricultural commodities.
Today, the many futures markets across the globe not only provide a risk management tool for producers, consumers and commodity traders, they also provide a speculative market for large hedge funds and institutional investors to trade for investment and growth.
Since the beginning of June, there has been a substantial rally in the US futures markets, much of it driven by fund short covering. The CBOT September soft red winter contract has risen US112 cents a bushel, or about $60 a tonne.
The biggest mover has been the Minneapolis Grain Exchange (MGEX) hard red spring wheat (HRSW) contract. On the back of extremely dry conditions in the key producing states of the US and Canada, the September contract has risen almost US234c/bu, or about $112/t.
Thirty-three per cent of that increase came in the two trading sessions following the release of the US Department of Agriculture (USDA) quarterly stocks and seeding report.
The report revealed smaller than expected US and Canadian spring wheat plantings, on top of the extremely dry conditions.
This prompted massive fund buying of wheat across all major exchanges, including Europe.
Corn and soybeans also got caught up in the hype.
I think it is pretty safe to say the funds are now on the long side of this wheat market.
Delving a little deeper, there is a story within a story here. The US spring wheat crop is a big producer, and supplier, of high protein wheat to the world.
Much of that demand is quite inelastic.
Any significant reduction in production puts added pressure on other major, northern hemisphere, high protein origins such as Germany, Poland and the Baltic States (Estonia, Lithuania and Latvia). And, of course, it puts pressure on price, as we have seen recently.
Australia can also benefit. The domestic production woes have largely been ignored by the overseas pundits to date.
Many still have Australian wheat production up around long-term average levels of 24 to 25 million tonne.
The reality is the Australian wheat crop is suffering big time.
The trade in Australia is coming to terms with the possibility of a sub 20 million tonnes wheat production year, for the first time since 2007.
The protein profile of this year’s Australian wheat crop will most likely be much higher than last year.
The high proportion of ASW seen last harvest will probably be replaced with a much higher proportion of H1 and H2, and even APH2.
In addition, continued high protein production issues in the northern hemisphere will quite likely manifest itself in very attractive protein spreads here in Australia.
How will the Australian grower capture these protein spreads? I suggest that any forward wheat sales should certainly favour floating spreads on multigrade contracts at this stage of the season and let the global production, and protein, poker game play out.