Mecardo Analysis - ASX for 2020
- By: "Farm Tender" News
- Cattle News
- Aug 14, 2018
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By Andrew Whitelaw | Source: Mecardo, ASX
It might sound like groundhog day, but we are going to discuss ASX wheat futures again. With the recent jump in futures, we want to revisit the opportunity to lock in a very strong price for 2020.
We spend a lot of time talking to producers and consumers of grain. When we start discussing the harvest after this one, the typical response is “It’s too far away to think about”. I can understand this point from consumers, why buy into a high-priced environment when anything could happen in 2019? However from a producers perspective, the opposite should hold, what if next year is a bumper crop?
The ASX contract suffers from a lack of liquidity, however with the drought conditions interest in this contract has expanded. The contract has jumped to highs in recent weeks, with Jan 2020 trading at $370 on Friday (Figure 1). This pricing allows you to lock in a very strong price, at a timeframe beyond the next northern hemisphere harvest.
To put this into perspective, we can look back at the east coast APW price since deregulation (Figure 2). On this chart, the broken line at $370 provides a level for comparison against historical prices. I don’t think this chart needs any commentary. At these levels, you are able to lock in a price* 17 months out at levels rarely seen this decade.
*Providing liquidity doesn’t dry up.
Key points
* Last week Jan 2020 ASX wheat futures traded at $370
* This provides cover 17 months out, at historically very strong levels.
What does this mean?
We just do not know what will happen in 2019. We currently have very high basis levels against Chicago, we could see a big crop in Australia which will pressure basis. Likewise, if the world crop is a bumper, then overall prices will slide.
Alternatively, things could deteriorate further and prices could rise. However, as a risk management strategy locking in a small proportion of your requirements at levels >$350 for a period 17 months into the future is a solid strategy.
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