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Wednesday, November 06, 2013

What to do with wheat swaps?

By Angus Brown  |  Source: CBOT, ASX

Key points

  • December Wheat swaps are due to expire at the end of November.
  • There are 3 basic options when swaps expire, and each depends on plans for physical wheat.
  • Make sure you don’t ‘do nothing’ by default - make a decision either way.


2013-11-06 What To Do With Wheat Swaps FIG 1

December wheat swaps sold through banks, as well as December 13 Chicago wheat futures, close out at the end of November, with the actual expiry dependant on which bank you are with. Now is the time to start looking at what you are going to do when swaps expire, especially if you are not going to deliver grain before the end of the month.

Essentially, there are three options we can take when swaps expire. The first is to take a physical position, the second is to roll the hedge forward on international swaps, and the third is to do nothing.

Taking a physical position involves selling a forward contract for delivery to maintain price cover and lock in basis.  This strategy is a good one if you are going to cash your grain at harvest, as physical APW basis is currently OK, ranging from $0-30/t depending on where you are.  The risk is still that your crop gets frosted, or rained on at harvest, and you don’t have the physical grain.  The benefits are that you have a harvest price locked in, and if basis happens to fall as a result of harvest pressure, you aren’t caught selling at low basis or holding in the hope basis improves.

Rolling the hedge forward into March or May is an option for those who aren’t planning to price wheat until after harvest.  Rolling the hedge leave the local basis open. This may not be a bad thing this year, as wheat basis could well follow the trend seen last year (figure 1) where it improved to $20-40 post harvest.  Obviously, growers will incur a loss if prices rise. However, with prices still at historically strong levels, maintaining some cover on international markets is prudent.

Doing nothing involves just that, with swaps allowed to expire, profits (this year) taken and added to whatever physical wheat prices is achieved when it is sold.  This year, most sold swaps should be currently $20-50 ‘in the money’.  This means the swaps have done their job, and growers are happy to speculate on prices until they sell. Obviously the ‘do nothing’ strategy is for those who believe there is upside in the international market.  If you think basis is too low, but not sure about international market, see the second strategy re ‘rolling the hedge’.

What does this mean?

What you do with your wheat leading up to or when swaps expire will be guided by what you plan to do with the physical wheat.  It is important that the ‘do nothing’ strategy is not taken by default, but considered along with the other two strategies in light of the level of the market, your view of the market and your physical selling strategy.

For what it’s worth, wheat still looks overpriced in the international market, and unless prices drop another $15-20 prior to the end of the month, maintaining some cover against prices falling would be prudent.

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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