Nogger's Theory Of London Wheat Price Relativity #2

01/12/15 -- The unusually large price differential between old and new crop London wheat keeps catching my eye. I know I've mentioned this before, but in a market like this one, it really is a stand-out feature. I've done a bit more research into the recent past, here it is....

The last full trading day for Nov 15 London wheat was Friday Nov 23, when the contract went off the board at £112.35/tonne. Nov 16 closed at £125.50/tonne that day, putting the long Nov 16 contract at what looks like an unusually large £13.15/tonne premium to the nearby month.

Indeed, the far forward Nov 17 adds a further GBP7.00/tonne or so, for an overall premium of over GBP20/tonne compared to the expiring front month.

Do these differentials provide something of an opportunity in a market that seems almost devoid of any if you are a UK cereal grower?

One thing worth noting is that back on Jul 1, the first day of the 2015/16 marketing year, the premium on offer for Nov 16 over Nov 15 was only GBP3.95/tonne. Nov 17 didn't trade until Jul 8 this year, but when it did that contract was only paying a GBP7.40/tonne premium to Nov 15.

Both these differentials have therefore widened considerably in the last 4 months. In fact the Nov 15-Nov 16 spread finished at more than 330% of what it was as relatively recently as Jul 1, and the Nov 15-Nov 17 spread has increased to more than 270% of what was on offer on Jul 8.

As far as UK growers are concerned, despite the fact that these forward positions are currently offering prices that are substantially higher than those nearby, there’s little interest in selling this far forward.

“Why should I sell that, I’m only locking in a loss?” I suspect would be a common retort among the arable fraternity to the suggestion that selling Nov 16, let alone Nov 17, should even be considered.
That reply of course entirely ignores various points:
  •  Well, you’d sell spot at that wouldn’t you if the market was offering it? And you’re only locking in a loss there as well.
  •  Having nothing sold for 2016 means that you are carrying 100% risk that prices will go up from here. The last 12 months or more have proven that this isn’t necessarily the case. Market price has no respect for your cost of production.
So let’s have a look at the last few years in detail, and see if the notion of selling a bit of your 2016 production is quite as crazy as you might think.

A casual glance at where market prices where a little over 12 months ago, on the last day of trading of the Nov 14 London wheat contract, shows that anyone selling the forward Nov 15 contract that day would have a sale on board at £137.25/tonne – around £25/tonne better than when the contract expired a day or two ago.

Nov 15 was incidentally a £15.25/tonne premium to the nearby Nov 14 that day, not too much different to the premium on offer recently.

Indeed, it’s only really in the last 18 months or so that a premium of anything like this sort of nature has been available for the 12 months hence long Nov contract.


Cast your mind all the way back to 2010. Apple released the first iPad; Volcanic ash from Iceland brought chaos to the European aviation industry; Wolves, Blackpool, Bolton and Birmingham City were in the Premier League; London wheat was trading in the £90’s.

The market became aware of a major drought in Russia around June of 2010. By August President Putin had announced an export embargo on wheat. By the close of the year front month London wheat close a pound off £200/tonne.

The Nov 11 contract was trading between parity and a £10/tonne premium throughout the first half of the year. As soon as the market began to shoot up, that differential plunged to a discount of around £20-30/tonne.


Fast forward to 2011. A busy year. The Japanese earthquake/tsunami; the Royal Wedding; Bin Laden and Gaddafi killed; Amy Winehouse refuses once and for all to go back to rehab.

It was also a volatile year in the grain markets. Nov 11 London wheat almost hit £200/tonne before capitulating and closing the year at little more than £140/tonne. The long Nov 12 was a discount to the nearby Nov 11 for the entire year – and by £25/tonne or more on occasions.


Twelve months down the line, 2012 was a year almost identical to 2010. Wheat prices steady around the £150/tonne mark throughout the first half of the year, rose rapidly to trade in excess of £200/tonne in the final quarter, as Russia suffered its second serious drought in the space of three years.

The long Nov 13 contract, which was trading around parity to the Nov 12 contract during the first half of the year, suddenly slumped to a discount of around £25-35/tonne as nearby prices shot up.


Another volatile year in the global grain markets, and one that was similar to that of 2011. The world’s first ever production year In excess of 700 MMT saw London wheat prices slump from in excess of £190/tonne to around £150/tonne at harvest-time.  Again, as prices declined, the price differential between the nearby Nov 13 and the forward Nov 14 position improved.

The long Nov 14 contract began the year trading at a discount of almost £25/tonne to Nov 13, before steadily improving to actually offer a small premium around harvest-time, before slipping back to around £7-10/tonne under towards the expiry of the Nov 13 month.


A year that is perhaps fresher in the mind, and also another that clearly illustrates the trend that high(er) wheat prices generally mean lower forward premiums are on offer. Nov 14 London wheat peaked at around £160/tonne in the spring, following Russia’s annexation of Crimea and subsequent support of rebels in the east of Ukraine.

As a second successive record global wheat loomed though, and tensions between Russia and the West eased, world and London wheat prices declined to post a harvest low of sub-£110/tonne. The long Nov 15 contract had been trading at a discount to the nearer Nov 14 contract at the height of the Russian/Ukraine nervousness. That had risen to around a £15/tonne premium by the end of the year. 


And so to 2015, our current year. Prices aren’t far off the lowest levels that we’ve seen during the entire period under review, so it’s maybe not surprising then that the long Nov premium on offer is close to being the highest that we’ve seen during this time.


What, if anything does all this tell us? It seems clear that when the market considers that wheat prices are high, then the prices on offer further forward reflect the assumption that things won’t stay this good for ever – and usually with good reason as they don’t!

This doesn’t necessarily mean though that selling a long way forward at a substantial discount to what’s on offer “today” is a bad move. Back in Nov 2012 you could have forward sold Nov 14 London wheat at GBP175/tonne, but very few did. Why? Well spot wheat 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.

Similarily, when prices are low (as they are now), the market will often dangle the grower a bit of a forward carrot  - a £10-15/tonne premium to sell wheat 12 months or more hence. The price might still be considered low by the grower, but a £10-15/tonne premium is still guaranteed extra money in the bank when the time comes – money that may well not be ultimately on the table when the combines start rolling.

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 and the market does nothing but go up from here would 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, on the other hand, the market repeats the last 12 months in the next 12 then you'll at least have some wheat sold at 13 quid over the market next year. Tick.

Banking a bit of the extra seven quid or so premium on offer for 2017 might not be a bad idea either.