CME Group cash settled Canadian Western Red Spring Wheat (CWRS) Financially Settled (Platts) futures are a regionally specific risk-management tool for global market participants looking to hedge their flat price exposure or basis risk. CWRS trades at a premium to soft red winter wheat (SRW), the predominate deliverable class of wheat on CBOT Wheat futures; as well as to hard red winter wheat (HRW), the deliverable class of wheat on CBOT KC HRW Wheat futures. In recent weeks the war in Ukraine has narrowed the price gap between CWRS and CBOT winter wheats from 40 percent pre-invasion, to 10-25 percent in March and April 2022, tightening the correlation between spring and winter wheat pricing in an environment where global supply is paramount.
Grown primarily in the Western Canadian provinces of Saskatchewan, Alberta, and Manitoba, CWRS thrives in cold, dry climates. Spring wheat, like CWRS, has a higher protein content than winter wheats, such as SRW and HRW, which are planted in late fall and are harvested in late spring or early summer. The distinct growing season of spring wheat, which is planted in climates too severe to withstand the overwintering process demanded by winter wheat, yields a lower-moisture, higher-protein wheat kernel. The trading seasonality of the two wheat types naturally reflects the distinct respective growing seasons: new-crop SRW and HRW wheat begins July 1 each year, while new-crop CWRS wheat begins September 1 each year. Canada is a major wheat-exporting nation and CWRS comprises the majority of Canadian-grown wheat. The Canadian Western Red Spring Wheat FOB Vancouver Financially Settled (Platts) futures contract is based on a Platts assessments for the FOB Vancouver Canadian Western Red Spring Wheat No.2 market, which has a has a minimum protein content of 13.5 percent. The daily Platts assessment relies on a robust set of transactions, bids, and offers at the Port of Vancouver.
The similarities between the Platts CWRS assessment and the CBOT Chicago and KC HRW Wheat futures contracts results in price correlation between the assessment and the futures contracts. Seasonal and use-case differences between CWRS and winter wheats nevertheless causes the types of wheat to react in distinct ways to market inputs. Between November 1, 2021 and February 23, 2022 (prior to the February 24, 2022 Russian invasion of Ukraine), CWRS (Platts) FOB 30-45-day wheat was priced at an average premium of 40 percent to Chicago SRW wheat futures, as spring wheat is normally priced higher than winter wheat due to its higher protein content and perceived higher quality. The disruption of winter wheat supply following the Russian invasion of Ukraine sent Chicago Wheat futures prices temporarily above CWRS pricing. CWRS then settled at a premium to Chicago wheat futures of 10-25 percent in the period of mid-March through May 2022.
Daily CWRS (Platts) 30-45 Day Assessment and Daily Settlement Prices for Chicago Wheat and KC HRW Wheat Front-Month Futures; November 2021 through May 2022
The Russian invasion of Ukraine created a scramble for grain to replace the uncertain supplies of winter wheat originating in the Black Sea region. At the time of the invasion, winter wheat in the northern hemisphere had already been planted and was about to break dormancy. In the coming months, Ukrainian wheat that is successfully harvested will face challenges exiting the country with many key Ukrainian ports closed. Many fields in Ukraine may lie unharvested because former agricultural workers have either fled the country or entered the armed forces. The anticipated Black Sea supply crunch propelled Chicago Wheat futures, which generally trade at a discount to both KC HRW Wheat futures and CWRS, exceeding both classes of wheats in price in early March 2022.
CWRS did not experience the volatility that Chicago and KC HRW Wheat futures did considering the war in Ukraine because CWRS is not as functionally interchangeable with wheat grown in the Black Sea region. At the time of the invasion, new-crop 2022 CWRS had not yet been planted, while Black Sea and domestic winter wheats like SRW and HRW were well on their way to harvest. Volatilities of winter wheat futures and options show that longer-dated maturities did not experience the heighted volatility that shorter-dated Chicago and KC HRW Wheat futures maturities did in late February and early March of this year. Such a dynamic indicates that the supply issues stemming from the war were expected to be transitory, and perhaps not expected to last to the conclusion of the spring wheat growing season. With the war continuing, however, that sentiment is changing.
For the period of November 2021 through May 2022, Chicago Wheat futures prices and CWRS Platts 30–45 day assessments had an R2 of 75.80 percent. KC HRW Wheat futures, which represents a class of wheat more similar to CWRS wheat, exhibited an R2 of 87.47 percent.
CWRS (Platts) is more highly correlated with KC HRW Wheat futures in recent months compared to the period before the Russian invasion of Ukraine. The table below shows CWRS (Platts) 30-45 day vs. KC HRW Wheat futures, November 2021 through May 2022 by month, with the months preceding February 24, 2022 exhibiting a lower R2 compared to March through May 2022. Prior to February 24, 2022, the factors behind winter and spring wheat pricing were largely endogenous and distinct to each respective crop: weather, pestilence, regional supply chains, and local politics. In March through May 2022, however, global supply was paramount, creating a situation in which both winter and spring wheat pricing shared a strong, common influence.
Table 1: CWRS (Platts) 30-45 Day vs. Front Month KC HRW Futures, November 2021 to May 2022 by Month
|
Month |
p-value |
|
|---|---|---|
|
November 2021 |
58.18% |
<0.01*** |
|
December 2021 |
12.31% |
0.12 |
|
January 2022 |
63.66% |
<0.01*** |
|
February 2022 |
67.98% |
<0.01*** |
|
March 2022 |
84.34% |
<0.01*** |
|
April 2022 |
71.64% |
<0.01*** |
|
May 2022 |
81.22% |
<0.01*** |
Source: CME Group and Platts
All eyes are on global wheat supply and the need for industry players to manage regionally specific risk is more important than ever. The launch of CME Group’s cash-settled Canadian Western Red Spring Wheat (Platts) futures presents a new tool for farmers, merchandisers, importers, and exporters to hedge their exposure to Canadian Western Red Spring Wheat markets, which comprise a key share of the global wheat landscape.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
