Evolution of Wheat Prices on cash markets by protein levels in Germany since 2018

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The discrepancy in cash Wheat prices between different protein levels, although not absolute, stems from the need for different Wheat qualities for various purposes. The reasons for a procurement manager or a trader to target Wheat of a specific protein level ranges from volume to accessibility. However, the price is the common denominator between the two stakeholders as it can vary dramatically between Wheat protein levels and make the difference between a good and a bad trade, or a cargo won or lost.
By studying the evolution of Wheat price curves with protein level and time, and the statistical relationship between them, it is easier to understand how to address – and what to expect – from the market, particularly the German Wheat one.

Germany Wheat Prices with Protein levels

In 2018, several German Wheat products covered numerous different protein levels, showing great diversity.
Indeed, there are seven different types of protein covered in AgFlow’s database cash quotes: 11%, 11.5%, 12%, 12.5%, 13%, 13.5%, and 14% protein Wheat prices. There is also some 14.5% coverage with EXW Incoterm, but the data available is too limited to analyze this product.
At a glance, the dataset looks to fit relatively well with the Germany 12.5% Wheat parity. Hence, looking at German Wheat price data with the 12.5% Wheat price curve can show a trend in the data.

Figure 1: Wheat Protein Products Prices for Germany vs. 12.5% Wheat Prices for Germany Between Jan 2018 and Sep 2020

The curves in the two plots of Figure 1 represent the full Germany Wheat prices dataset before 2020 and for 2020. From these plots, one can make several observations:

• In plot 1, the German Wheat data does not fit well with the German 12.5% Wheat price curve before Jan 2019
• In plot 2, the German 12.5% Wheat product seems to drive the trend of the whole dataset

 While a group of data points clusters around the 12.5% Wheat prices, the data is mostly scattered and does not seem to be driven by it. However, this situation changes progressively in time. The data coverage being less dense implies fewer quotations and forcibly a smaller protein level coverage. This change in the German market data hints at a shift in the demand. Moreover, the price spread between the 12.5% Wheat product and the rest of the dataset significantly reduces with time. This price convergence could indicate that the German market is constrained towards a standardized Wheat price focusing on a single product.

Figure 2: Graph for Germany Wheat FOB Germany by Protein Between Jan 2018 and Sep 2020

The curves in Figure 2 represent the different protein level Wheat prices for the FOB Incoterm. There are several observations from this graph:

• The variety of protein Wheat FOB prices diminishes over time, and there are only two to three products left from Sep 2018 until Dec 2019
• There is only one Wheat price: Germany 12.5% Wheat FOB Germany, from Jan 2020 onwards
• The price spread is well-defined for 14% Wheat until Sep 2019, when its quotes disappear and the price gap is at its smallest with the 12.5% Wheat price

Figure 2 provides excellent insight into the German market. Indeed, the period between Jan and Jul 2018 reveals that the price gap varied with the protein level of Wheat.
Moreover, the observations made from the graph follow the ones from Figure 1.
Indeed, the number of protein level Wheat products shrank with time and the Wheat prices slowly aligned with the 12.5% Wheat ones.
The bear market also reached its lowest price in Sep 2019 after a hard-hitting drought in Europe, showing that this event considerably reduced the price gap between Wheat products. Looking at the Wheat price spread curves shows this more precisely.

The plots in Figure 3 highlight the spread between higher and lower protein level products. As previously demonstrated, the closer the protein level gap, the smaller the price difference.
Nevertheless, in this case, the price spread curves further confirm that the price gap reduced, and disappeared with time. Indeed, the price spread between 12% Wheat and 12.5% Wheat (both FOB) were close to or equal to 0.0 $ in both Spot and two-month shipments, and slightly over 2.5$ for three-month shipments. Coincidentally, 12% Wheat prices quotations stopped between Sep and Nov 2018. Additionally, a similar trend seems to occur between the 14% protein Wheat and 12.5% protein Wheat quote prices.

Ultimately, the price spread for various protein level Wheat products changed drastically. In early 2018, three price groups evolved simultaneously: 14% Wheat, 13.5% Wheat, and the other protein Wheat products centered around 12.5% Wheat prices. Then as time went one, the price gap evolved favorably to 12.5% Wheat prices due to market demand. As such, the prices for the various protein products progressively aligned with the 12.5% Wheat product before quotations stopped by Nov – Dec 2018 for all other Wheat quotes, except for 14% Wheat. Furthermore, during the 2018-2019 campaign, the droughts may have helped close the gap between 14% and 12.5% Wheat, leading to the German market standardizing towards a unique product and, therefore, a single price curve.

Germany Wheat Prices Correlation and Collinearity relationship

The correlations and collinearity for the various German Wheat price curves and products can show the relevance of long-term relationships, along with their predictability, and hopefully, confirm the trends revealed previously.

Figure 4: Table for Correlation and Collinearity for Average Protein Wheat levels For Germany

The combinations computed in the table for Figure 4 exclude obvious perfect correlations (comparison with the same parity), leaving only combinations between the top products. Moreover, combinations that had correlations below 0.725 were excluded.
The changes for collinearity statistics between similar combinations are due to the variable dependence in multicollinearity. Also, perfect correlations between some combinations don’t show relevant numbers for the collinearity test, as – almost – perfect combinations’ p-values are just rounded to 0 since they are so small, and t-values tend to minus infinity. On the other hand, while some price curves are significantly correlated, they may not be collinear. This is, for example, the case of 14% and 13.5% Wheat products.

There is a strong collinearity relationship for these combinations, weighted by the t-static variations. The p-values also consolidate the t-statistic with most combinations falling below the 5% critical value (or above 95% confidence level), showing high predictability between them.
This data then strongly supports the observations made for Wheat prices overall. It shows that German Wheat prices align, correlate, and are collinear with the 12.5% Wheat Price curves, and therefore verifies the long term relationship from at least 2018.

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German Wheat Prices Outlook

The German Wheat cash quotes’ data and the Wheat Price curves highlighted the market’s evolution throughout the years. It showed how Germany went from having many protein level products to a single protein product, and a standardized market to respond to the international market demand, probably accelerated by large events such as the drought of summer 2019.
Furthermore, the table for correlation and collinearity between Wheat prices confirmed the notion that Germany 12.5% Wheat products drove all German Wheat prices from at least 2018. This situation led to prices getting closer to this specific product and ultimately to their disappearance from the German Wheat market.
Finally, the German Wheat market evolved towards a standard protein Wheat product with several Incoterms, mostly skewed towards the E.U. market, but also trying to align to the international demand. Consequently, the data doesn’t show any consistent drive for premiums on protein level for the German Wheat price market, in contrast with what our previous study showed.
This effect is maybe a consequence of E.U. policies and trade deals. However, one can ask whether this holds for the rest of European countries, as country policies and international demand differ, even within the E.U.
Another study over the same period, on French Wheat, will show whether the E.U. major Wheat producer shows similar conclusions, and if the E.U. is indeed a major influence on national productions.