By Andrew Whitelaw | Source: USDA, ASX, ACA
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.
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.
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