So what therefore is the impact of USD moves on the European Grains market? A weaker Euro is undoubtedly supportive for European prices but correlations between the Euro and the Matif wheat and rapeseed market tells us that the level of significance is fundamentally driven. Overall correlations using front- month continuation data going back to 2007 is 0.27 for wheat and 0.029 for rapeseed, demonstrating a very weak trend and not the negative correlation we would expect to see. Table 1.1 details crop years back to 2010/11 running correlations on the most liquid November/December and May positions. It is very clear that currency impacts are most significant to European markets as an importer rather than exporter and the Euro effect on wheat in particular is not as strong as we might have thought. As regards wheat, the past three seasons to 2014/15 have shown a positive correlation between the Euro and wheat prices. Rather than suggesting this relationship is cause and effect, the fundamental characteristics are that the EU is a net exporter of wheat into regions such as North Africa with relatively inelastic and historic demand. Crops in 2012/13 and 2013/14 both showed a negative correlation in line with what we would expect, with the interesting point to note that, in both seasons, the stocks- to- use ratio fell below 10% from the 12% to 15% norm. Harvests in 2014 and 2016 were plagued with difficulties, as reduction in output and significant quality issues hampered export channels. Therefore, it is little surprise this correlation broke down.
MATIF
Wheat Correlation R² Z16
16/17 15/16 14/15 13/14 12/13 11/12 10/11 12/13
K17 Z15 K16 X14 K15 X13 K14 X12 K13 X11 K12 X10 K11
OSR CORRELATION
0.29 0.21 0.41 0.31 0.88
n/a n/a n/a n/a n/a
-0.05 0%
OSR Correlation X16
K17 X15 K16 X14 K15
-0.44 19% X13 -0.46 21% K14 -0.51 26% X12 -0.35 12% K13 0.56 0.22
n/a n/a
-0.25 6% 0.08 0%
X11 K12 X10 K12
16/17
-0.35 12% -0.55 30% -0.22 5% -0.33 11% -0.49 24% 0.11
n/a
-0.68 46% -0.63 40% -0.70 49% -0.54 29% 0.76
n/a
-0.26 7% -0.55 30% -0.07 0%
OSR CORRELATION
The overall theme, therefore, is that currency correlations are stronger in the Matif rapeseed contract and in seasons where overall stocks and carry- out is reduced. For rapeseed it is logical that the market trades to a level where it buys supply and therefore trade pricing must be directly competitive to global markets. Critically the delivery and execution of the contract is efficient with the market successfully going through to delivery across stores throughout France, Germany and Belgium. This keeps the contract true relative to the market. Interestingly, since 2010/11 season, Matif has recorded an average 3,318 lots at delivery per season compared to wheat deliveries of 3,362 on a crop that is over six times bigger and has a large delivery limit. The Matif wheat market is therefore a much more complicated affair and it is no surprise really that correlations to the Euro are weaker. As mentioned the archaic physical execution of the contract through French export silos is responsible for a degree of ‘disconnect’, with the contract heavily influenced by the French market. Wheat exports of 25 to 30mlnt are significant and, while it needs to be sensitive to global markets, Europe does benefit from a degree of inelastic demand when exporting into regions such as North Africa. Import levies and quotas also restrict the volume of cheap imported wheat, helping to protect domestic markets. This reduces global competition, thereby creating a strong internal inter-European trade.
49% 29%
X12 -0.70
K13 -0.54
12% 30%
X16 -0.35
K17 -0.55
George Eddell E:
george.eddell@admisi.com T: +44(0) 20 7716 8054
13 | ADMISI - The Ghost In The Machine | January/February 2017
Analysis on rapeseed shows greater consistency and a stronger inverse relationship to the Euro. We see negative correlation for every crop year dating back to 2010/11, signifying that a weaker Euro is supportive to underlying values. By squaring the correlation value, the calculation identifies the extent of the effect that one variable has on the other (known by statisticians as r² ). If we take the November 16 contract as an example, statistics tell us that 12% of the underlying price is related to weaker currency fluctuations over the contract life. On the fundamental level, Europe is a net importer of rapeseed of between 2.5 and 4.5mlnt with, in particular, a 2016/17 forecast of over 4mlnt. 2011/12 crop year is a slight anomaly in the correlation data with the November 11 contract demonstrating a rising Euro and a rising Matif price. This was the year that coincided with the Russian Wheat export ban which provided overall support to markets, but the season also showed high European stocks- to- use ratio for rapeseed of 9%. 2014/15 is also interesting in that imports were only 2.3mlnt while only the November contract showed a Euro influence of 24% while the May contract displayed a positive correlation of 0.11.
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