Mecardo Analysis - J'habite en Australie

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By Andrew Whitelaw | Source: Matif, Euronext, ASX

Key points

· The ASX contract does not have the strongest correlation with Australian prices. A very big surprise considering the ASX is based on Australian pricing.

· The strongest correlation between Australian physical pricing has been with French wheat futures.

In recent weeks we have been providing analysis on alternate markets for hedging Australian wheat. In this final analysis we will examine French, British and Australian markets. The results are quite surprising.

In this analysis, I have decided to look at two major European bourses (Paris and London) and a check on the local futures contract. The ASX contract should have the highest degree of correlation due to its obvious proximity to our cash market.

The prices used during this analysis are the spot price converted into A$/mt. I have used the figures for Geelong versus the different bourses as this pricing point has the highest degree of correlation, and to avoid having dozens of charts.

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As a reminder, a perfect correlation is 1 and no correlation is 0. In order to provide the most statistically valid result the returns are used instead of the price. The return is the change in price for each pricing point. A correlation of 0.60-0.80 would be considered strong for returns.

In figure 1, the correlation between Liffe wheat (London) and Geelong is shown. The correlation for returns is 0.63 and 0.93 for price. This is a strong correlation for both returns and price.

In figure 2, the correlation between Matif wheat (Paris) and Geelong is shown. The correlation for returns is 0.82 and 0.98 for price. This is an extremely strong correlation, in fact close to perfect for the period examined.

In figure 3, the correlation between ASX wheat (Sydney) and Geelong is shown. The correlation for returns is 0.65 and 0.93 for price. This is a strong correlation, but at similar levels to London, however not as strong as the Paris futures.

This is a rather unusual result, as it would be logical to expect ASX futures to have a higher degree of correlation with Australian prices than overseas futures markets.

The correlations are summarized below in returns (table 1) and price (Table 2). In these charts I have included the correlations for all the major contracts which we have analysed in recent weeks. I have highlighted the market with the highest correlation for each port zone.

The results are frankly quite shocking. Parisian wheat futures have the highest degree of correlation for both returns and price.

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*If you want a copy of individual charts – send me an email

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.

The most interesting part of this analysis is that ASX over this timeframe has not had the strongest correlation. It is Paris.

I was asked by a reader – "What is the point in looking at other contracts, we only use CBOT". I think it is important as trade flows change, different contracts may become better suited to hedging Australian wheat.

www.mecardo.com.au

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