New Lows For London Wheat, Stick Or Twist?

18/08/15 -- EU grains trade mostly lower, with Nov 15 London wheat setting another new lifetime contract low of GBP114.75/tonne before recovering slightly.

At noon, Nov 15 London wheat was down GBP0.70/tonne to GBP115.00/tonne, Sep 15 Paris wheat was EUR1.25/tonne lower at EUR174.00/tonne, Nov 15 Paris corn was EUR0.75/tonne easier at EUR176.50/tonne, whilst Nov 15 Paris rapeseed was up EUR0.50/tonne to EUR371.25/tonne.

News that UK inflation rose to the dizzy heights of 0.1% in July was all it took to see sterling rally more than a cent against the dollar to a 7-week high of over 1.57 versus the US currency. It's also currently testing 1.42 versus the euro.

More importantly, core inflation (which excludes energy, food, alcohol and tobacco) jumped 0.3 percentage points to 1.2% year-on-year, and now lies above its 1999-2007 average of 1.1% (and base rates averaged 4.8% during that time). That's getting the market thinking that a UK interest rate rise might not be too far away.

MPC members and BoE governor Carney have long since stated that rising core inflation is one of the key factors behind the timing of the first interest rate rise in years.

A sharply higher pound was enough to send London wheat to new lows on the benchmark Nov 15 contract. The next marketing year Nov 16 contract now trades at a GBP12.00/tonne premium to the current front month last night. Does that mean it's a sell?

The HGCA said late last week that as the Nov 16 contract has now been trading for over a year, nearly a third of the time available to market the 2016 crop has already elapsed. "Anyone aiming to achieve the market average price would typically target to have sold nearly a third of their anticipated production at this point in the marketing window," they noted.

Hands up all of you who've done that? Right, that'll be nobody then. It is worth noting that this is a more than 10% premium - double what is currently available to carry Dec 15 Paris wheat into Dec 16. The premium on offer in Chicago incidentally is currently around 7% to do the same thing.

The disparity between the London and Paris carry is particularly interesting, given the widespread conviction that the pound will continue to rise in value versus the euro over the ensuing 12 months, don't you think? Barclays currently have the GBP forecast at 1.47 versus the EUR in Q1 of 2016.

Doing nothing and relying on good old fashioned hope isn't really a great marketing strategy is it? Neither is selling at a loss I hear you cry. Fair comment of course, but if you could now sell Nov 15 at GBP127/tonne would you? There's a few more hands going up now than when I asked a minute ago. I'm not advocating selling the entire crop here of course, but nothing sold at all does equal 100% exposure.

Another option of course is don't plant it rather than fret for the next 12 months that all you are doing is losing money. But then if you don't plant it, and half of those around you do likewise, the stubborn old buggers that have gone ahead and planted regardless will end up making a killing won't they? Bugger!

Paris Dec 16 wheat currently trades at the equivalent of GBP132/tonne using the spot GBP/EUR exchange rate. If the pound is 1.47 in 2016 that's around GBP127.50/tonne - virtually the same price as the current Nov 16 London feed wheat contract.

At the very least, selling London and buying Paris would seem to potentially offer some reward.