2023 Wheat Hedge Model Results

Posted on by Ashland Commodities

Below are the results of my systematic hedge model when applied against wheat for the entire calendar year of 2023.

MODEL STATISTICS ASSUMING 100% FUTURES:

2023 Notes:

As you can see, for calendar year 2023, assuming that we only bought or sold futures contracts, the average wheat sell signal was $7.15/bu and the average buy signal was $6.65/bu. A few additional key highlights:

  •  The highest sell signal of the year was $7.5975, roughly $0.32 away from the highest close price of the year. 
  • the lowest sell signal of the year was $594.25, roughly $0.54 away from the lowest close price of the year.
  • The average sell percentile was in the 82% percentile.
  • The average buy price was in the 62% percentile. 

A note on the buy percentile for 2023: In 2023, the market was in a strong downtrend (part of the reason we have more buy signals that sell signals). As such, the model somewhat finds itself in a situation where it is chasing its tail. Every buy signal is higher than the last. The opposite would be true in a strong upward trending market too. This is where it becomes critical to use tools like options to allow for continued downside recovery. 

Additional Model Notes:

This is again, only using futures for coverage and simply executing when the model tells you to execute. While these results overall meet the objective of providing a repeatable process that takes the guesswork out of markets, they can be further optimized by:

  • Using options to adjust for underlying supply and demand considerations. For example, when prices are in their 75th percentile and the expected supply and demand is growing, it doesn’t make sense for consumers to buy futures.
  • Adjust duration for market percentiles and seasonality. Again, looking at the market as a guide, producers should have more forward sales in place when markets are historically high, and consumers should have less forward coverage in place when markets are historically high. The opposite is also true when markets are historically low. 
  • Working ER Targets if needed. When markets are trending lower, my model does not get as many sell signals. lt will still get some, but trending markets skew models. This makes sense because as markets trend lower there are fewer overbought conditions. The opposite is also true when markets are trending higher. For those that are not comfortable receiving 1-5 buy/sell targets a year, I also have what I call ER (expected range) targets that can we worked for any time period. This allows users to supplement coverage if needed and to stay within duration recommendations. 

 

Want to see other years? The article below better defines what my risk management process is and shows the back testing of hedge results across a number of commodities and a number of years.

 

Want to Know More:

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