Brought to you by AG Concepts

Tuesday, February 21, 2017

Why do we talk about futures?

By Andrew Whitelaw  |  Source: USDA, ASX, ACA

Key points

  • The relationship between futures contracts in Australia and US are closely intertwined
  • The correlation between contracts is high at >70, and above 90 between ASX and local physical pricing. 

2017-02-21 Grain Fig 1

2017-02-21 Grain Fig 2

The readership of Mecardo has increased dramatically in recent months, and many readers have been asking about the importance of futures and why we follow them. In order to create a strong grain marketing strategy, it is important to have at least a rudimentary understanding of grain futures. In this analysis, we review the relationship between futures and physical prices in Australia.

A lot of the grain commentary on this website and the industry in general will focus on CBOT. There are many in the industry who still maintain that growers should not be looking at futures when it comes to the formulation of a strategy, is this the case?

In figure 1, the local futures contract (ASX) and the CBOT soft red winter wheat contract in Australian dollars per metric ton is plotted. The ASX contract is a good representation of the local Australian price however does have additional regional basis. It is quite clear that both the contracts follow one another closely.

It is always important to bring the futures back to a local level, which is shown in figure 2. This chart shows the ASX contract and the ASW price in Geelong from 2003. In this chart, we can see again that the relationship is again close with on general a discount for quality as the ASX contract is based on APW1. The difference between the two contracts is known as basis and this is shown in grey.

These relationships between pricing points can be summarised in table 1. This table shows the correlations between a different points and timescales. A correlation of 1 would indicate a complete relationship between movements, and 0 would indicate no relationship. In the table 1 we can see that the relationship between our local physical pricing and futures is strong.

What does this mean?

The majority of Australian wheat is exported, and competes with many different origins on price. The worlds consumers of grain base their purchases using futures.

It is important as a grower to follow futures, as it will assist with formulating strategies and also identifying opportunities for arbitrage. 

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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