Spring Wheat Fundamentals and Technicals Webinar€¦ · Spring Wheat Fundamentals . and Technicals...

Spring Wheat Fundamentals and Technicals Webinar

by Joe VictorBusiness Development Specialist

The institution where open competitive free world market exist.

Spring Wheat in Canada and U.S. correlate as one entity which can

dominate the world market.

The platform of transparent open markets can guarantee farmers receive the best price for their wheat.

Always enhancing the Hard Red Spring Wheat contract. (removal of

U.S. origin for delivery and vomitoxin) Record financial results are increasing.

Offers security and capitalization levels to ensure a safe place to trade.

Since its inception in 1881, MGEX has been the principal market for Hard Red Spring Wheat (HRSW) – first as a cash market, then futures and options.

Millers, bakers, exporters, grain elevators, farmers and investors look to MGEX when they trade HRSW wheat – and with good reason. MGEX is a stable and reliable trading environment, revered in the international community as a good place to do business.

MGEX is multifaceted with its platform for futures, options, and its index products. MGEX also offers memberships, market information from independent sources as well as soon to be released apple juice futures and options. Please visit www.mgex.com for a host of detailed information.

Hard Red Spring Wheat Futures Contract Specifications TRADING HOURS: Electronic: 5:00 p.m. - 2:00 p.m. Sunday - Friday (Central Time) CONTRACT UNIT: 5,000 bushels TICKER SYMBOL: Electronic: MWE DELIVERY MONTHS: March, May, July, September (New Crop) and December DAILY PRICE LIMITS: $.60 per bushel or $3,000 per contract for every other month. No limit for the spot month (limits are subject to change, please refer to MGEX Rulebook or homepage for current limit information). MINIMUM PRICE FLUCTUATION: 1/4 cent per bushel or $12.50 per contract 

Hard Red Spring Wheat Futures Contract Specifications (Continued) SPECULATIVE POSITION LIMITS: Spot month: 600 contracts Single month: 12,000 contracts All months: 12,000 contracts DELIVERABLE GRADES: No. 2 or better Northern Spring Wheat with a protein content of 13.5% or higher, with 13% protein deliverable at a discount. DELIVERY POINTS: Elevators located in Minneapolis/St. Paul, Red Wing and Duluth/Superior LAST TRADING DAY: The business day preceding the fifteenth calendar day of that contract month FIRST NOTICE DAY: The last business day of the month preceding the delivery month FIRST DELIVERY DAY: The first business day of the delivery month LAST NOTICE DAY: The last business day preceding the last delivery day LAST DELIVERY DAY: The seventh business day following the last trading day 

Hedging Canadian Wheat in the MGEXHard Red Spring Wheat Futures

The North American wheat markets are well integrated which makes it possible to hedge Canadian spring wheat in the MGEX hard red spring wheat futures contract. The following graphs and data show the relationship between Canadian prices (or prices representative of Canadian locations) and the MGEX futures prices. Thunder Bay, Domestic Milling Prices1 In Canadian dollars (CD) per metric ton (MT), the Canadian Wheat Board’s (CWB) quoted price for domestic 14% protein milling wheat at Thunder Bay tracks the MGEX nearby futures price very closely. The correlation in weekly price changes is 0.80 which suggests that the MGEX serves as an effective hedge even over short horizons. The cash-futures basis is relatively steady with an average of CD 44.00/MT.

Northeast Montana, Elevator Prices

As a proxy for Canadian country elevator prices, the USDA’s Northeast Montana quote for 14% protein spring wheat is utilized. Assuming that prices in the Canadian prairies are comparable to the U.S. prices, Canadian farmers can expect a correlation of 90% between week-to-week changes in country prices and the MGEX futures. Moreover, the basis should be fairly constant at around CD 10.00/MT under the nearby futures price.

Importantly, the data in these analyses include 2007-2008 when wheat prices hit all-time highs. In a more subdued market environment, hedging Canadian wheat in the MGEX spring wheat futures could perform even better than the results presented here.

West Coast, Portland Prices As a proxy for the West Coast export markets, the USDA’s Portland (delivered, train) quote for 14% protein spring wheat is utilized. Assuming that Vancouver prices for Canadian spring wheat comparable to the U.S. West Coast prices, then Canadian merchants can utilize the MGEX spring wheat prices for hedging. Despite a few missing observations, the Portland prices show a week-to-week correlation of 0.88 with the MGEX futures. The Portland basis is consistently around CD 49.00/MT.

Currency Considerations The above analysis assumes that hedges are in a common currency. The correlations were run for weekly price changes assuming a currency hedge (common currency) and without a currency hedge (across currencies). The correlations are presented below for data from August, 2006 through December, 2011.

The correlation in weekly price changes declines by 0.02 to 0.06 when hedges are placed across currencies as opposed to in a common currency. Even without a currency hedge, the correlations range from 0.74 to 0.86. This suggests that over weekly horizons the MGEX spring wheat futures can be effective risk management tools for Canadian producers, processors and end-users.

Common AcrossCurrency Currencies

Thunder Bay 0.80 0.78St. Lawrence 0.78 0.74NE Montana 0.90 0.86

Portland 0.88 0.82

MGEX Index Contracts

MGEX (Minneapolis Grain Exchange, Inc.) is a commodity exchange in Minneapolis, MN USA. MGEX is the world’s largest market for hard red spring wheat futures and options trading.

400 South 4th Street130 Grain Exchange Building

Minneapolis, MN 55415phone: 612-321-7164

jvictor@mgex.comwww.mgex.com

Analyzing Volume and Open Interest on the MGEX Hard Red Spring Wheat Futures

Ken Shaleen,

President, CHARTWATCH Inc.

www.chartwatch.com

International Futures Research

Analyzing Volume and Open Interest on the MGEX Hard Red Spring Wheat

Futures

Ideal Healthy Bull Market

PRICE

VOLUME

PRICE DOWNVOL. DOWN

PRICE UPVOL. UP

Ideal Healthy Bear Market

PRICE

VOLUME

PRICE UPVOL. DOWN

PRICE DOWNVOL. UP

Determination of High, Low, and Average Volume

17 Readings above 5,500 = ‘High’18 Readings between 3,900 and 5,500 = ‘Average’20 Readings below 3,900 = ‘Low’

PRICE

VOLUME

EXTREME HIGHVOLUME

EXTREME HIGHVOLUME

Blowoff Volume

PRICE UPO.I. UP

PRICE

OPENINTEREST

Ideal Healthy Bull Market

PRICE

OPENINTEREST

PRICE DOWNO.I. UP

Ideal Healthy Bear Market

PRICE

O.I.

VOL.

PRICEUP

O.I. UPVOL. UP

MOST BULLISHSITUATION

MOST BEARISHSITUATION

PRICEDOWN

O.I. UPVOL. UP

General Rule for a Healthy Price Trend:Volume and Open Interest Should Increase as Price Moves

in the Direction of the Major Price Trend

Trend Component of Open Interest Increase and Expiration Phenomenon

Analysis, Chart One

Thank You!

• For more information:

Joe Victor – jvictor@mgex.com or 612.321.7164

Ken Shaleen – chartwatch@aol.com or 312.454.1130

www.mgex.comwww.chartwatch.com