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Thursday, December 07, 2017

Understanding the horizon is beyond me.

By Andrew Whitelaw  |  Source: CME, ACA

Key points

  • Spot futures have fallen to below 400¢/bu.
  • The December futures contract is pricing at A$235/mt.
  • The current basis scenario leaves a sub $300/mt unless high basis levels are achieved. 

2017-12-7 Grain Fig 1

2017-12-7 Grain Fig 2

2017-12-7 Grain Fig 3

When marketing our wheat, it is important to always be considering the horizon. The market provides opportunities, at times they will be close, at others they will be distant. In this article, we take a look at the futures market, and examine the opportunity to hedge our wheat.

It’s not been pleasant watching the wheat future market in recent years (figure 1). Overnight the spot futures contract fell below 400¢/bu or A$193/mt.

In recent months, there were attractive opportunities for growers to use Chicago futures to which can be assessed in previous articles (July, August, September, October). In this update, we will look to see whether growers should be locking in futures on the distant horizon. As we have a number of consumers reading these articles, this gives an insight into whether current values offer enticing levels to lock in the futures component of an input price.

In figure 2, the forward curve is displayed. The wheat futures market is in contango, where forward contracts are at higher levels than the spot market. The most important months to examine for next season are July, September and December. At present these months are trading at A$219, A$226 & A$235. These levels are higher than the spot market, however are at relatively low levels.

It is important when analysing a swap position to take into account basis. At present Australian grain is trading at a substantial premium to the futures market, taking some of the sting out of a low pricing environment globally.

Through some scenario analysis, you are able to determine what possible final returns are achievable. In figure 3, a series of basis scenarios are displayed for the July, September and December contracts. In our scenarios we have used a strong (+$70), medium (+$35) and weak (+$10) basis level. The scenarios, at present only provide a >$300/mt return using the December contract and with a strong basis level.

Obviously, basis levels change dependent upon various factors (3 elements to consider when pricing grain). For instance, basis levels in some areas are well above $70, which provide an additional ‘bonus’ above scenarios.

What does this mean?

Each individual business needs to make its hedging decisions based on a range of personal factors. At present, for a grower it is not overly inviting to lock in the futures component of the wheat price. That is not to say that in coming months, as we go through the northern hemisphere growing season that opportunities will not present themselves.

The reverse is true with grain consumers, at these levels, a low entry point is available for the futures component of next years demand. This then just leaves the basis level unprotected.  

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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