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Tuesday, March 14, 2017

To hedge or not to hedge : A historical perspective

By Andrew Whitelaw  |  Source: CME

Key points

  • The average change between March and December has been -1%.
  • The average carry between March and December futures contracts has been US20¢/bu.

2017-03-14 Wheat Fig 1

2017-03-14 Wheat Fig 2

In an article last week, we analysed the historical change between seeding and harvest for canola pricing. Today we will examine the historical change for wheat, to determine whether over the longer period of time whether it is worthwhile to lock in futures for either buyers or sellers.

In figure 1, we have plotted the change of price from March versus harvest pricing. The methodology for this particular chart is to use the average price in March for the Dec contract of the same year, then compare with the change in spot futures during the harvest period. This does not take into account basis or foreign exchange components – however, futures make up the majority of our Australian price.

The overall average price change between March and harvest over the period 1974-2016 has been -1%. In the past four seasons the futures price has been 16% lower on average at harvest than March. This can largely be attributed to the falling market due to the ever-growing global wheat production & stocks.

The carry between March and harvest futures is displayed in figure 2, and has between 1974-2016 averaged US20¢/bu or US$7/mt. During the majority of the period in question, the forward curve has been in contango (see here). This is where the market has been paying a premium for Dec over March, in only 10 years during the period the market has experienced backwardation.

In a historical sense the futures market between March and December has to only rise 20¢, to cover the cost of carry. Therefore, as a grain consumer it is prudent to have some cover to protect from price rises, this is exacerbated when the market is at low deciles.

What does this mean?

On a historical basis, it is relatively neutral whether it is worthwhile to lock in futures for harvest during March. However, it is important to take each year on a separate basis and formulate your view taking into account the current market structure.

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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