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Tuesday, February 28, 2017

The best and worst of wheat for the year

By Andrew Whitelaw  |  Source: ACA, CME, RBA

Key points

  • The difference between the high and low price under a flat price environment is on average $68.
  • Through separating pricing elements, the difference between the high flat price and high separated price is around $30.
  • However, the worst-case scenario for separating is substantially lower than flat pricing and this can be mitigated through price risk management strategies.

2017-02-28 Grain Fig 1

2017-02-28 Grain Fig 2

2017-02-28 Grain Fig 3

How time flies! In a month and a half seeding will be underway throughout Australia for the 2017/18 season. In this update, we will look back at the current marketing season and gain an insight into the best and worst case scenarios for flat pricing, and using a separated strategy (swaps/futures).

The last twelve months have been provided poor prices in relation to previous years, however yield for the most part has made up for this. At Mecardo we advocate that the separation of the pricing components of basis and futures, as the one of the strongest ways of both determining value of grain, and developing strong strategies.

In this report we will look at a what difference separating the basis and futures from your decision making could have made to the end result. The data used in this report was the port pricing point for APW1 across a number of ports between 1st April 2016 & 27th February 2017.

Most grain producers in Australia use flat pricing, this is where the we accept the physical price from the buyer including futures, fx & basis. The worst, best and average price is displayed in figure 1. The difference between the worst flat price and best is $68, and the best and average is around $40.

Through separating your pricing elements, it effectively gives the producer two (or three if you separate FX) pricing points to lock in a price. This does carry an element of risk, as you could get it wrong on both accounts, however if you are following the market well and using all the tools available it should be possible to achieve a higher return.

In figure 2, the worst and best cases for selected for separating pricing are plotted. The difference between the best and worst, is quite considerable, with the worst case scenario being considerably lower (-$26) than the worst flat price. Conversely the best case was also higher than the best flat price by around $30. 

This scenario is hypothetical and we wouldn’t expect many to hit both the highs (or lows), however it does give an insight into potential results. The difference between the average and best for flat and separate pricing is highlighted in figure 3, and we can see that across all port zones we find a potential premium to be achieved. 

What does this mean?

It is clear that separating the pricing elements provides a greater opportunity for higher rewards, however there is also a chance of a poorer return. However, with a firm price risk management strategy, it is possible to minimise exposure to the downside.

At the bare minimum, even if using flat pricing, it is important to understand the separation of pricing. 

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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