In this issue: What Mercaris Forward Prices Tell us About Where the Market is Heading
     
                    

Mercaris Market Data:

What our forward prices can tell us about where the market is heading

 
With fall harvest just around the corner, we thought this would be a good time to share some information on spot and forward prices from the Mercaris Data Service.

We began collecting delivered prices (for both spot deliveries and forward contracts) in January 2013. With more than a full year of price/volume data to draw on, we can now address an important question: Are forward prices a good indicator of where spot prices will be weeks or months into the future?
 
The data gathered by Mercaris is the most comprehensive data currently available to test the relationship between organic spot and forward pricing. The data set consists of 1,273 price points for organic wheat, corn and soybeans collected through ongoing surveys from four regions of the U.S. and Canada— Midwest, Northeast, South and West. We have data points for 18 different grain-growing states and two Canadian provinces. For our purposes, a spot price refers to any transactions with a delivery date within 30 days, while all other transactions (with delivery up to a year from the date the contract was signed) are considered forward contracts.

Our analysis looks at how spot relates to forward price in the Midwest only, rather than aggregating all transactions across the U.S. We chose to focus on this region for a few different reasons. First, research suggests that organic prices are more affected by regional market forces than are conventional commodities. Second, our survey suggests that some regions like the Northeast do not use forward contracts as frequently, so will not provide a meaningful point of comparison. Finally, the Midwest is the most data rich region (for our purposes the Midwest includes IL, IN, MI, OH, WI, IA, KS, MN, MO, NE, ND, SD). Slightly more than half of all price points in the dataset are for corn transactions in the Midwest. 46 percent of the price points for soybeans and 47 percent of the price points for wheat are in the Midwest.

We have constructed two tables from the data: Table 1 is a scatter of forward and spot prices against delivery date and Table 2 is the ratio of the average forward price for a given month of transactions against the average spot price for the same month. If the point is above 100 percent, it shows that average forward price was above spot price for that month. If forward price was equal to spot price, the data point would be exactly 100 percent for the given month.

Table 1: Midwest Spot & Forward Organic Commodity Prices Over Time

 
A Look at the Relationship Between Spot and Forward Prices
 
For both soybeans and corn, forward price has reasonably anticipated spot market price over the past year. This suggests the markets are deep enough, price signals are well communicated, and participants are aware of market fundamentals. It also means that no unexpected event, such as a drought, greatly impacted either supply or demand during this timeframe.

For wheat, however, an interesting phenomenon known as backwardation seems to be present. Backwardation occurs when spot market prices rise above of forward contract prices for the contracted delivery date. This is evident in the Midwest wheat market as shown in Table 2 where the ratio spot price to forward price is well above 100 percent. Mercaris data showed dramatic spot price increases for all commercial grades of organic wheat in early 2014 with prices for Hard Red Spring Wheat prices reaching historic highs, of over $20/bushel.

Table 2: Midwest Ratio of Forward to Spot Prices


We suspect several factors contributed to this trend. Although yearly organic acreage reports are not available, we know from the last two USDA National Agricultural Statistics Service reports that organic wheat showed a loss of acreage between 2008 and 2011 (the last crop year available).  While we don’t have data on wheat acreage since 2011, this could be contributing to decreased supply.  Furthermore, most of the U.S. experienced extended and record-breaking cold weather last winter, which may have negatively impacted the Winter Wheat crop enough to further reduce supply.
 
The Importance of Price Signals
 
If all goes well with late summer weather, very soon delivery of grain that was contracted weeks or months ago will begin taking place. The lack of critical data for organics means that there is not much information on the relationship between spot and forward prices. Organic markets tend to be thin and non-transparent, which impacts both buyers and sellers and can lead to all sorts of difficulties. Without good price signals, and with few ways of managing price risk, forward contracting can seem precarious. By tracking both spot and forward organic and non-GMO prices, Mercaris offers a resource to keep track of market trends, and helps you keep an eye on grain markets and your bottom line.
 
 Mercaris would like to thank Sara Hooker, Consultant, for her research and writing contribution to this month’s article.

 

It is always wise to look ahead, but difficult to look further than you can see.  

-Winston Churchill

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