Nogger's Blog

19/10/15 -- As mentioned in Friday's EU grains report Nov 15 London wheat was trading at a slightly more than GBP15/tonne premium to the front month Nov 14 a year ago, and the differential between the near Nov 15 and long Nov 16 positions are almost exactly the same today.

Twelve months ago, and much the same today I guess, few probably fancied the idea of selling the long Nov position, fifteen quid premium or not. GBP130/tonne is below the cost of production most would say, so what's the point of locking in a loss at this early stage of the game?

Well, one point would be that IF the next 12 months turns out to be a carbon copy of the last twelve, then in a year's time prices will be fifteen quid less than what's on offer today, so your "hold off" strategy might just end up costing you more money.

What you are guilty of here is ignoring several of the golden rules of trading:

a) Letting your emotions get the better of you. "It's got to go up, we can't carry on producing wheat at a loss." Maybe that's true in the long run, but have you (or any of your neighbours) significantly scaled back (or plan to) your wheat plantings for 2016? No. Strategie Grains forecast EU wheat plantings down just 0.4% for next year's harvest.

b) Running with the herd. "Everybody" around me (ie every other cereal grower you know who is in exactly the same boat as you) says that the price has to go up. They're saying it because they want to believe it. They wanted to believe it 12 months ago too, that's why very few took the GBP15/tonne long Nov premium then.

c)  Recency bias. "Wheat has spent much of 4 of the last 5 years in the GBP150-200/tonne range, therefore it HAS to go back to that sort of level." It spent most of the previous 25 years in the GBP70-90 region.

d) Money imbalance. Viewing money already spent or lost as more important than money that could be spent or lost in the future. "Well, I've lost X thousands already, what difference is another 15 grand (or whatever) going to make?" It's 15 grand  - if it's that unimportant to you send it to me!

All these rules apply equally when the market is in an inverse.

Back in Nov 2012 you could have forward sold Nov 14 London wheat at GBP175/tonne, but very few did. Why? Well spot stuff was making GBP220/tonne back then, so GBP175/tonne (even though it guaranteed a healthy profit unless yields were an unheard of disaster) was viewed as locking in a loss. Money imbalance. Tick.

Your emotions got the better of you back then. Tick. "Everybody" said that finally wheat was going to be GBP200/tonne forever, yipee! Tick. What had happened in the last year or two was far more important and relevant than everything that had gone before in your entire lifetime. Tick.

Footnote: Yes, I do still believe that we will see wheat at GBP200/tonne again one day in the not too distant future (just probably not in 2016). I took plenty of stick in the trade for saying that the other week - just as I took plenty of stick for forecasting prices to drop back to the GBP100/tonne level when they were over GBP200/tonne.

Look at where the price of spot wheat is now, and look at the Nov 16 price. If you sell Nov 16 and it ultimately proves to be the worst sale on your books will you be happy? I would be if I was you. Tick. It would also mean that all the unsold 2015 crop that you have sitting in the barn should move up in price too. Tick. If the market repeats the last 12 months in the next 12 then you'll at least have some wheat sold at 15 quid over the market next year. Tick.