Ag News

Mecardo Analysis - This year is sorted (for price), what about next? Part 2

  • By: "Prime" Ag News
  • Aug 02, 2018

By Andrew Whitelaw | Source: CME, Mecardo.

On Tuesday we considered forward hedging wheat production for the 19/20 harvest using CBOT. In this second part, we look at using the ASX wheat contract for next year’s harvest, with some comparisons against CBOT.

On Tuesday we considered forward hedging wheat production for the 19/20 harvest using CBOT. In this second part, we look at using the ASX wheat contract for next year’s harvest, with some comparisons against CBOT.

The ASX wheat contract is a fantastic tool and one which could assist producers and consumers in Australia to manage their price risk. Unfortunately, like many other price risk management tools in Australian agriculture it has struggled with limited liquidity.

However, it does seem to attract volume during a drought, as end users attempt any avenue to gain access to pricing.

The ASX has found volume in recent times, particularly during the past two months. Although all global wheat contracts have shown gains, during July the ASX contract has seen a month on month rise of 19% against the CBOT smaller but equally welcome gain of 10% (Figure 1).

2018-08-02 Grain Fig 1

When we look forward to the 19/20 harvest the rise has been somewhat subdued. This is hardly surprising, as buyers are less likely to want to lock in prices for a far forward month when there is still another harvest between now and then. Month on month the ASX is up 8% and CBOT is up 6% (Figure 2).

2018-08-02 Grain Fig 2

The increase in basis for the coming harvest is attributed to the drought conditions in NSW placing the Jan 2019 contract at a A$98 premium over CBOT. To give this some perspective the average basis since the start of the year is A$50.80. The January 2020 contract is, however, trading at A$52, which although strong is still close to average.

Australian Canola, sorghum, barley, lamb & cattle futures have been released from various providers with little success.

2018-08-02 Grain Fig 3

Key points

   * The ASX January 2019 contract has risen 19% since the beginning of July.

   * The ASX basis over CBOT is currently A$98; the average for the year is A$50.

   * The more distant forward contracts have not risen as sharply, however, offer a good opportunity for hedging.

What does this mean?

If we are hedging for 19/20 harvest using ASX we are locking in a strong pricing level, with an above average basis level.

When using ASX, we have to remember that there will also be a basis between this contract and the local physical price you receive. However, the basis between the ASX and physical should be less volatile than the basis between CBOT and physical.

There are arguments for and against using either contract for hedging for the 19/20 harvest which will be largely dependent upon your risk profile and viewpoint on basis levels.

www.mecardo.com.au