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Tuesday, September 26, 2017

A swaps update: We need to make sure we don’t leave anything on the table

By Andrew Whitelaw  |  Source: MLA, CME, ACA

Key points

  • Basis levels around the country are historically strong.
  • Dec’17 futures have fallen $70 & Dec’18 $51 since the 5th July.
  • In Port Kembla, growers utilising swaps could have achieved prices just shy of $400/Mt.


2017-09-26 Grain Fig 1

2017-09-26 Grain Fig 2

2017-09-26 Grain Fig 3

In July and August, we took a look at swap values, and how they offered a good opportunity to lock in a substantial proportion of the wheat price. This analysis is an update on how the scenario would be playing our currently. At present prices are strong, but we need to make sure that we don’t leave anything on the table.

The term basis is regularly bandied around, and I believe that for growers understanding the concept is key to ensuring the best results from your marketing. We have discussed this regularly, including in the recent ‘The basis of basis’.

In effect, the basis is the premium or discount over futures prices. Overall the futures price makes up the majority of our pricing, and typically Australia wheat has traded at a premium to Chicago. Therefore, at its most simplistic, when we are able to lock in futures at a profitable level, the basis could be considered the cherry on top.

In figure 1, we can see the forward curve has been plotted for the Chicago soft red winter wheat contract in US¢/bu. This chart displays the forward curve for both the 5TH July, 1ST August & present day. These dates are when we have previously updated on the forward curve. As we can see, the futures market in US¢/bu has dropped considerably since the previous updates, reducing much of the opportunity available for forward swaps.

In figure 2, the same forward curve is displayed, however in A$/Mt. If we look at Dec’17, the futures on the 5th July were $280/mt, and Dec’18 at $296. At present, these are now $210(-70) & $245 (-51) respectively. This is a huge fall, and those growers who have sold swaps at these levels would be sitting very comfortably.

At present cropping conditions across much of the country are in dire straits, which as logic would dictate has results in higher basis levels, especially in the domestic dominated east coast markets. In figure 3, the basis scenarios previously discussed (strong, medium & weak) have been plotted against current basis levels and the flat price.

As we can see the use of a swap would have resulted in very high prices, especially in the Port Kembla zone. Although flat prices (the contract price from traders) are strong in that zone, through separating your price to basis and futures, a return $70p/t higher would be achievable. 

What does this mean?

Although this analysis is based on taking out swaps on one particular day, when our analysis recommended the use of swaps, even if the swap had been taken out +/- 5 days from initial analysis the returns would be strongly beneficial to the grower.

It is true that flat prices are currently strong, however through being strategic with our grain sales and separating our pricing into its component parts, we are able to make sure our returns are as high as possible. We need to make sure we leave as little as possible on the table. 

We recommend that every grain grower in Australia, ensures that they are set up with their bank for the use of swaps. This is a very simple process, and has zero cost. This will enable you to ensure that you are able to quickly take advantage of opportunities in the market as they arise. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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