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Tuesday, May 09, 2017

Holding grain: Was it worth it?

By Andrew Whitelaw  |  Source: Ag Concepts

Key points

  • Overall APW1 prices have remained largely flat, apart from Adelaide which has experienced heavy falls. If cost of carry was applied to a flat market the result would be negative this season to hold APW1.
  • ASW1 rose in all zones (excl Adelaide) however when cost of carry was accounted for only Kwinana and Port Kembla remained positive.
  • The best time to sell for Geelong, Kwinana and Port Kembla was in March, which follows the historical trend.

2017-05-09 Grain Fig 1 Final

2017-05-09 Grain Fig 2 Final

2017-05-09 Grain Fig 3

During harvest grain pricing was in the doldrums after years of successive large global crops and a bunker bursting local one, many decided to hold off their sales program. In October Mecardo wrote an article discussing whether it was worthwhile holding onto grain post-harvest. In today’s analysis, we examine whether it has been worthwhile to store grain.

The October article examined past seasons to give an insight into whether from a historical perspective it was worthwhile to hold out for post-harvest rallies.

In this analysis we have looked at both APW1 and ASW1 performance at port, as these two grades make up the majority of Australian wheat production. Due to examining a number of different ports, both figure 1 & 2 are animated and will scroll through the different ports at 2.5 second intervals. As always if you would like copies of charts please let me know and I will email copies through (for Mecardo premium subscribers).

In figure 1, the average APW1 price for 2010-present is plotted. The green banding is the standard deviation with grey line showing the average in this period. It comes as no surprise to see that all zones are well below average. In the ports selected the APW1 price has largely stayed quite stable since harvest in Geelong, Kwinana and Port Kembla. This is not the case in Adelaide which has seen continual monthly falls.

The 2016/17 season was largely a wet one, and the dominant grade was ASW. In our conversations with the trade and growers, it was apparent that higher proteins were sold sooner and low proteins (ASW and below) were store either in the system or on farm for post-harvest sales. Therefore, the same charts are provided for ASW. These charts follow quite a different direction with all zones (apart from Adelaide) showing gains since the beginning of the year. At a simplistic level, we can say that in most zones examined that it was a good idea to hold onto ASW, but we have to take into account the cost of carry.

In figure 3, we have plotted the change in average price from December to Jan-April. In this chart we have used a cost of carry of 6% interest and $1.04 per month for capital*, in order to calculate an approximate on farm storage cost. As we can see, Geelong and Adelaide never recover when cost of carry and change in price from this season are taken into account. In Port Kembla and Kwinana, the return is positive for holding ASW from February, with Kwinana’s positive result stemming from the lack of storage charges in this example.

In all ports with the exception of Adelaide, the best time to sell was in March which coincides with our analysis in October which identified from a historical perspective a higher likelihood of rises in Feb/Mar and September.

*In Kwinana we have removed cost of capital, as the bulk of the crop is held in CBH with no storage charges until October 2017.

What does this mean?

This analysis shows that this year carrying grain has for the most part not been worthwhile, due to a flat market in APW, and in ASW a market that hasn’t been able to exceed the cost of carry in most areas.

It has to be pointed out that this analysis is general in nature, and uses the port averages and individual farmers will have received higher (and lower) prices than average and the cost of carry will be different for each enterprise. 

It is important to continue to revaluate your strategy when holding grain, do we continue to hold and hope that possible grain gains outweigh the accumulating cost of carry or do we use derivatives to gain exposure to the market without physically holding grain?

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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