Farm Tender

Mecardo Analysis - Is America still relevant?

This article is bought to you by Bruce Robertson Transport and Macarthur Stockfeed and Rural Supplies.

By Andrew Whitelaw | Source: CME, Mecardo

Key points

· The three US-based wheat futures contracts have different correlation levels.

· The Kansas contract has the highest degree of correlation, followed by Chicago then Minneapolis.

· The Black Sea contract overall has had a higher degree of correlation than US futures over the past two years.

In our recent analysis ‘The Australian black sea', we examined the correlation between Australian grain prices and black sea wheat futures. Since we conducted this analysis, a number of our premium subscribers asked similar questions related to the relevancy of US futures to the antipodean market.

Traditionally the wheat market has always revolved around what happens in the United States. However, in recent years their importance has diminished on the export market. Nonetheless, it still contains the worlds most liquid futures market.

Producers and buyers in Australia have often focused on the US market and their futures contracts. In this analysis, we will examine whether Australian and US prices correlate, and therefore make an appropriate hedge.

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There are three wheat futures contracts in the US. These are the Kansas/HRW, Chicago/SRW & Minneapolis/HRS. These each have their own quality characteristics which are described in an article produced last year (see here).

Here the focus is on the returns correlations, as this is the most statistically significant measure of correlation. The correlations have been calculated against Kwinana, Adelaide, Geelong, Port Lincoln & Port Kembla in order to provide a solid representation of the bulk of the growing region. In order to provide as much information as possible, each of the figures have been provided in an animated format*.

As a reminder, a perfect correlation is 1 and no correlation is 0.

In Figure 1, the Kansas futures show a moderate to strong correlation ranging from 0.46 to 0.69 dependent upon zone. The highest correlation is with Kwinana and the lowest with Port Kembla/Geelong.

2019-08-20 Grain Figure 1

In Figure 2, the Chicago futures show a weaker correlation than the Kansas futures. The range runs from 0.36 to 0.64 dependent upon zones. The highest correlation is with Kwinana and the lowest with Port Kembla/Geelong.

2019-08-20 Grain Figure 2

In Figure 3, the Minneapolis futures show an even lower degree of correlation than either of the previous contracts. The range is substantially lower at 0.28 to 0.53, with Kwinana again having the highest correlation, but Port Lincoln holding the weakest link.

2019-08-20 Grain Figure 3

The correlations are summarized below in returns (Table 1) and price (Table 2). We have also included the black sea correlations from last weeks analysis for side by side comparison.

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What does this mean?

This analysis only covers the correlations over the past two years. This time frame was chosen to compare like for like against the black sea futures.

It shows that over that period, the black sea contract has had a much higher degree of correlation. It is still early days, but this contract could be a valuable tool for offshore hedging purposes.

Although, it is important to realise that correlations can change over time, therefore it is important to choose your hedging instruments and markets based on the information and market viewpoint at the time of entering into a contract.

www.mecardo.com.au

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