Mecardo Analysis - The future is not that far away
- By: "Farm Tender" News
- Cattle News
- Oct 11, 2018
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By Andrew Whitelaw | Source: CME, Mecardo.
The coming harvest is almost assuredly going to see prices at strong levels. In this article we examine what the overseas futures market is offering for the 19/20 harvest and whether it provides an attractive opportunity for hedging wheat.
Most eyes in the Australian grain trade are firmly focused on what is happening locally. As we are in a drought our local basis is the big driver of pricing. We must however continue to pay close attention to overseas futures. After a run of poor years where prices remained in the doldrums, Chicago futures have performed well in 2018 (figure 1), with the spot contract up 20% since the start of the year.
The peak of the past three years has been in July, with a sharp fall following. This season the fall has not occurred but not quite as drastically, due to the concerns being more legitimate than prior seasons. In Australia, prices are based on overseas futures plus (or occasionally minus) a basis premium. In this season our basis premium is trading at levels unseen since the end of the regulated environment.
In the future, our prices will return to normality which necessitates the requirement to maintain a close eye on overseas futures to make the best strategic decisions.
The forward curve for wheat is currently pricing a premium in the forward months (figure 2). The closest contract to the next Australian harvest is December 2019 currently trading at A$300/mt. This provides growers with the opportunity to sell wheat at a pricing level considered to be relatively comfortable. It would then be down to the grower to concentrate on locking in a basis level, which is effectively the cream on top.
There are also opportunities to hedge using ASX futures, which I discussed last week: Warning: This isn’t the new level
Key points
* The Chicago SRW wheat futures have risen 20% since the start of the year.
* The Dec 2019 contract is trading at A$300/mt
* This price does not include local basis, which is typically positive.
What does this mean?
As we are fourteen months out from the 2019/20 harvest it is best that any strategy is taken in bite sizes. We have no visibility on what will happen to the global crop (or Australia) in 2019, it is therefore advisable that any hedging leave enough room open to participate in any market rallies, which historically we see in the 2nd/3rd quarter of the year.
Derivatives are just another tool and there are many who attempt to make them sound more complicated than they are. We recommend that all producers gain at least a rudimentary knowledge of them, as they provide the capacity for increased pricing levels.
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