Mecardo Analysis - The Australian black sea
- By: "Farm Tender" News
- Cattle News
- Aug 15, 2019
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By Andrew Whitelaw | Source: CME, Mecardo
Key points
· The black sea nations are dominant exporters.
· The correlations for both price and returns are strong.
· The black sea futures contract has the potential to be an appropriate hedging tool for Australian wheat.
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The Black Sea region has become the most important export origin for wheat. To put this in perspective, Russian exports have increased from an average 5mmt in the first five years of the century to an average of 32mmt. In this article, we look at whether Black Sea futures are appropriate for hedging Australian wheat.
The countries of the former USSR have become dominant within the world wheat trade. Whilst during the same period Australia has seen little increases in production, therefore, limiting our ability to increase our export program.
At Mecardo we regularly examine all the different avenues for hedging as they can each provide differing opportunities. In this update, we thought it would be interesting to revisit (see here) the relationship between Black Sea futures and Australian prices, especially in light of both regions typically being export focused.
Last year when we examined the relationship between both pricing points, a reasonably strong relationship was shown. At that time, the black sea futures had only been around for less than a year.
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This analysis has been produced to examine the correlations between futures contracts and our local wheat price. The pricing used for both is the spot price.
Figure 1 (animated) shows a number of port zones around Australia against the black sea futures, displaying the returns (or change in price) on a monthly basis. The use of returns is the most statistically valid method for measuring correlations in a time series. Our port zones closely follow the movements in Black Sea futures.
In Table 1, the correlations for both price and the returns are shown for several Australian ports. A perfect correlation is 1, and no correlation is 0. The price and return both show a high degree of correlation.
What does this mean?
We expected the relationship would have weakened considering drought conditions causing basis to rise dramatically. However, the correlations have improved.
Based on this analysis, the black sea futures contract could be considered an appropriate tool for hedging Australian wheat pricing. It is important to consider that the contract has only been in operation for a short period of time – the correlations may weaken in time.
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