By Angus Brown | Source: CME, ASX
With the weather clearing and harvest clearly ramping up, many growers will be faced with the decision of whether to sell or hold grain. But it’s not that simple. Derivative contracts that are available mean all sorts of strategies can be applied depending on individual circumstances.
Harvest is definitely ramping up, with Graincorp receiving 1.096mmt of grain last week and 68% of that being in NSW. Graincorp now have 2.8mmt in store, with other bulk handlers receiving grain at a similar rate. Many growers will simply be delivering grain and warehousing, with decisions to be made post-harvest. In this article, we take a look at how those decisions will be framed.
Many growers will simply warehouse grain because they don’t like the price. There might be a bit of that this year. With prices not quite $300/t port, many growers will be tempted to hold out for more. Growers need to take into account, however, that there are three components that make up Australian grain prices. These are the international price, the Australian dollar and, of course, basis.
If you don’t like the price, you need to know which component you don’t like. There might be a better way to get exposure to this particular component without holding physical, and accruing all the costs that come with that.
Chicago Board of Trade (CBOT) Wheat is recognised as the benchmark international price, and it only takes a little analysis to discover it can be blamed for our prices not being $300/t. Figure 1 shows CBOT wheat in US¢/bu since 2006. You can see that that it has rarely been lower than it is now, and only for brief periods. As such, there is significant potential for upside in international markets.
The lower the Aussie dollar, the better it is for grain growers, as it makes our grain cheaper in international markets. The Aussie dollar is currently very low: at 71¢, it has only been lower 4% of the time since 2009 (figure 3). This indicates there is limited upside potential for grain prices from a lower Aussie dollar.
Basis is probably the toughest component to get a handle on. The ASX East Coast (EC) Wheat premium to CBOT currently sits at $32. This is low by the standards of the past two years, but strong relative to non-drought years before that (figure 2). In percentile terms, EC Wheat is sitting at 63%, which, along with the weak Aussie dollar has ASX EC Wheat sitting at the 49th percentile. Theoretically, this means there is basically an equal chance of it rising or falling.
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Essentially, the statistics are telling us that any real upside in wheat markets is going to come from a rising CBOT market rather than a falling Aussie dollar or significantly higher basis. This means that, by holding wheat, we are saying we think CBOT is going to rise, which is fair enough.
However, there are other ways to gain access to upside without markedly impacting cash flow. Growers could use a cash and call strategy on CBOT, leaving currency and basis out as they are already in the growers’ favour. Alternatively, CBOT swaps or futures could simply be bought to replace physical sales, thereby gaining full access to CBOT upside, but also exposure to downside.
The most important thing to take out of this is to know which part of the market you are targeting to profit from holding grain, and to assess if there is a better way in which to gain exposure to this.
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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