When it comes to the CME's Variable Storage Rate program for wheat, I'm for increasing the storage rate for both winter markets and leaving them at the higher levels.
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At the current official storage rate, the July-September HRW futures spread is testing its 100% calculated full commercial carry level.
Commodity Bulletin: From crude oil to coffee, this FREE newsletter is for industry pros and rookies alike The National SRW Wheat Index at the end of February indicated Q3 available stocks-to-use were at the largest level since at least 2020.
Over the years, I’ve had a number of discussions about the CME’s Variable Storage Rate (VSR) program in wheat. My view has been that it was unnecessary, and that changing the storage rate just so futures spreads don’t cover as much calculated storage rate can be viewed as misleading. For example, if a spread consistently covers 80% calculated full commercial carry, telling the world the US has too much supply of that class of wheat on hand, changing the storage rate so the spread covers a smaller percent doesn’t actually change the real supply and demand situation. It just makes it look less bearish. Many of my discussions were with Angie Setzer, and she tended to make a strong argument for VSR based on actual cash markets. I will say that my take on the idea hasn’t changed, but I will add that official storage rates for wheat should be increased and set semi-permanently. This process of possibly raising and lowering does not accomplish anything.
As we get rolling early in meteorological spring, more attention will be paid to the 2025 US winter wheat markets. If we use the generally recognized marketing year from June through the following May, the first new-crop contract for both HRW and SRW is the July issue. The question we can ask about both HRW and SRW is how fundamentally bearish are these markets during this transition from winter to spring? Keep in mind I look at a market’s reads on real supply and demand to answer this question: The National Cash Index for the market; National Average Basis; and Futures Spreads.
Let’s start with the largest class of wheat grown in the United States – Hard Red Winter (HRW). Part of the answer for new-crop fundamentals will come from old-crop supply and demand. At the end of February, also the end of Q3 of the 2024-2025 marketing year, the National HRW Wheat Index ($CRWI) was calculated at $4.97. This put the end of quarter available stocks-to-use at 44.1%, the second largest Q3 figure over the past 5-years, trailing only February 2020’s 48.4%. The seasonal tendency through Q4 is mixed the past 5 years with HRW available stocks-to-use decreasing 3 times and increasing twice. Based on the simplistic pattern of every other year, it would be expected to increase in 2025. The bottom line is there will likely be a cumbersome level of available supplies heading into the 2025 crop.
As for HRW national average basis, my calculation at the end of February came in at 76.25 cents under the May futures contract. The basis market has been running weaker than the previous 5-year low weekly closes since at least last December, also a bearish technical old-crop read.
But things really get interesting when we look at new-crop futures spreads. At the end of February, the HRW July-September closed at a carry of 14.5 cents and covered 89% calculated full commercial. Keep in mind that anything over 67% (70% according to some) is considered bearish. Additionally, when a CME VSR tracking period comes to an end, the upper limit that triggers an increase in storage rates is 80%. Wednesday morning has seen this same spread testing the 100% calculated level near 16 cents carry. Further out, the HRW September-December spread covered 79% at the end of February. The bottom line is the HRW market is incredibly bearish, from a fundamental point of view. This will make it easier for the noncommercial side to continue to add to its net-short futures position over the coming weeks and months.
It's a similar story in the SRW market where the National Cash Index ($CSWI) was calculated at the end of February at 44.9%, the largest Q3 figure dating back through at least 2020, and national average basis came in at 59.5 cents under May SRW futures. The previous 5-year low weekly close for the first week of March (this week) is 52.0 cents under May. Again, then, the old-crop reads on real fundamentals are bearish for the SRW market.
A look at futures spreads and the situation is not as dramatic as HRW, though the conclusion remains the same. As February came to an end the new-crop July-September was at a carry of 15.25 cents and covered 69% calculated full commercial carry while the September-December showed a carry of 20.0 cents and 59%. Fast forward to Tuesday’s close and we see the July-September at a carry of 16.5 cents and covering 75% while the September-December finished at 23.0 cents carry and 69%.
The bottom line is winter wheat is fundamentally bearish heading into the spring quarter (Q4), regardless of the arguments posed by others in the industry. How bearish? Plenty, and in the case of SRW, more than it has been for at least the past 5 years.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
