Recently the wheat market has moved to an inverse market. Fine you say, the market is upside down, so what does that mean?
A few of us have been discussing the market situation, on twitter. Happily we discuss the pros and cons of this situation, and what it means for marketing decisions. A few have questioned us as to what language we are speaking. I will attempt to translate for those who are not aware of what an inverse market is.
Wheat is traded on a “commodities market”. Basically a commodities market is designed to sell something today, for future delivery. Like it or not, wheat is in continual over supply, that’s what makes it a commodity, it’s easily interchangeable with other wheat. Because it is in over supply, and it’s easily substituted by other wheat there is not enough demand to use it all today. To encourage future delivery the market is always paying a higher price tomorrow. Most of us know this as carry, thus commodity markets can be described as carry markets, or “contango”.
When a market loses its carry, occurring when spot prices, or inter crop prices become higher in the nearer months, or crops, than the future crops this is described as a market inverse, or “backwardation”. Another term used by traders is “bull spreads”.
The signal the market is sending is “sell today, not tomorrow”. As the price is higher in the nearer month, or the closest crop the incentive is to sell sooner rather than later.
Anyone watching the wheat market on CBOT will notice this currently. March 2013 offers the highest quote for wheat on the board. And then the market goes into “backwardation” or is described as inverse. For us Australian’s December is the quote used to price our different season’s grains. Again, a glance at the quotes will show an inverse between Dec 2012 and Dec 2013. The market is saying sell your grain to me this year; don’t store it for selling next year. See CBOT Wheat here
An even better illustration is the Winnipeg Canola market and the CBOT Corn market, both inverse from the front month (first month quoted) and between crops. You will also notice the spot, or cash price is the highest price quoted.
For a further explanation on this, from the NYSE, check out the link in the comments section of my blog on pricing grain. Open the link “ENHANCING MARKET TRANSPARENCY”
While there is much more to understanding market signals, a basic understanding on carry and inverse market conditions can help, and I hope this assists.