Mecardo Analysis - Is the time right for hedging forward?

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By Andrew Whitelaw | Source: CME, Mecardo

Key points

· The CBOT wheat futures forward curve is in contango.

· At present, the CBOT wheat for next year is less attractive than an ASX hedge.

· Using a CBOT hedge for consumers may be more attractive than an ASX hedge, if basis levels return to normal levels.

Overseas futures markets have taken a tumble of late. In this analysis, we look at the CBOT forward curve to determine whether it is a good time to hedge forward. Is it a time for producers or a time for consumers?

At Mecardo we think it is always important to look as far forward as possible with your grain marketing, as this is where fantastic opportunities to increase pricing levels can occur. This especially works for producers as the curve typically tends to be in contango.

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The market is in contango when the forward futures price of a commodity is above the spot price. A contango market usually occurs when buyers are more willing to pay more for a commodity in the future than the present. This generally occurs in storable commodity markets, when there is an excess of supply. This typically encourages sellers to hold a commodity rather than sell for a spot price, as a ‘premium' is paid further out from the spot contract.

The Chicago wheat futures contract is currently showing premiums for forward contracts. During the past 18 months, Australia has received strong pricing levels, which have been driven by high basis levels due to on-going drought conditions.

If we look at hedging for next harvest (2020/21), Chicago futures provide an opportunity for producers to sell at A$268. This will provide a starting point where basis would need to be added, however, it would be more attractive to hedge using ASX futures at A$335 for January 2021.

On the flip side, consumers may find a hedge using CBOT more attractive. At A$268, if basis was to return to more normal levels next year then the overall price would potentially be lower than locking in an ASX contract.

What does this mean?

Locking in a CBOT hedge for 2020/21 is less attractive for producers at present. For east coast producers an ASX hedge might be the better option.

However, the CBOT hedge might be an option for consumers to gain a more attractive result if basis levels return to what would be considered normal levels.

www.mecardo.com.au

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