Mecardo Analysis - This year is sorted (for price), what about next? Part 1.
- By: "Farm Tender" News
- Cattle News
- Jul 31, 2018
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By Andrew Whitelaw | Source: CME, Mecardo
As the month draws to a close, it ends on a high (price wise). However, as always seems to be the case in Australian agriculture when prices are high production is low. The coming harvest is almost assuredly set for a high-priced environment. In this article we examine the following harvest.
The scene has been set for this year. Poor rainfall has decimated pasture in NSW & QLD, this combined with the normal domestic consumption of grain has led strong support for prices on the east coast for at least through until the 2019/20 harvest. The major exporters around the world are seeing declining exportable surplus.
The last fortnight has seen a strong rise in the Chicago futures market, for both the December 18 & 19 contracts (Figure 1). The December’19 contract has not risen quite as sharply as the current year, but this is not surprising as buyers are more inclined to hold off buying at these levels further out.
The forward curve for wheat is displayed in Figure 2. The wheat market is currently in contango, where the later dated months are paying a premium (or carry) over the spot month.
At present, hedging for the December’19 contract provides a good opportunity to bank in a hedge at a profitable level. This hedge will provide an A$300/mt starting point with which basis will be added. Historically all Australian ports have traded at a premium.
Key points
* Strong prices are almost set in stone for Australian producers, especially on the east coast during this current season.
* The CBOT futures contract offers A$300/mt for December’19.
* Typically Australian wheat trades at a premium to Chicago futures.
What does this mean?
We don’t know what the world will have in store for us in 2019/20. A strategic price risk management plan will look to lock in profits where possible. At present pricing, it is likely that hedging using December’19 futures will lead to above A$300/mt.
I always tend to advocate a ‘little and often’ strategy. If this became a bad decision and was the worst price received – the result would be strong. Later in the week, we will take a similar look at ASX which will also provide some strong platforms to commence the 2019/20 season.
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