Mecardo Analysis - What about grain consumers?
- By: "Farm Tender" News
- Cattle News
- Aug 28, 2018
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By Andrew Whitelaw | Source: CME, ASX, Mecardo.
We are a broad church at Mecardo. We don’t stick to one commodity and we have readers who are both on the buy and sell side of agriculture. Although we tend to focus our articles on the sellers of grain, in this article we look at the buy side.
The drought is getting unprecedented attention by both politicians and the media. There is focus on livestock farmers and imagery of suffering animals. There are two major impacts of the drought when it comes to grain; crop yields and pasture decline and increased feeding is required.
These two factors combine to increase the pricing of grain across the entire east coast. There are many farms which purchase grain on an annual basis; pigs, poultry and dairy. Although many will have cover for their feed requirements, there is only so far forward that you can physically buy.
The wheat price around Australia has shot up massively over the past month (fig 1), to the highest price in all port zones since 2010. The market has lost some of its fire in the past week, however fundamentals point to a high-priced environment for the coming year.
Is there anything we can do to get some protection for later in 2019 and early 2020. The ASX contract is a potential avenue for hedging. The January 2020 is currently trading at $345. This will give some protection from further upside if there is a continuation of the poor conditions into 2019. It is however locking in a price at the 90th percentile.
What about overseas? The Chicago futures market has taken a dive during the past week, with six consecutive sessions in the red (figure 3). Does this provide an option to jump into the market and get cover at a more respectable level (for a consumer).
At present the December 2019 contract trades at A$286. Although this isn’t attractive compared to where the market has sat in recent years. At present basis in Australia is extremely strong, if we see basis coming back to average levels or weaker, this will make the Chicago hedge more attractive.
Key points
* Grain prices have risen sharply and will impact on grain consumers.
* ASX for January 2020 is currently at A$345
* Chicago for December 2019 is currently at A$286
What does this mean?
The next 6-12 months is going to be tough for grain consumers, with prices set to continue to be high especially compared to the previous 48 months.
Our Australian prices are largely being driven by our very strong basis levels. The Chicago wheat contract for December 2019 has fallen back considerably from its highs at the end of July. However, if we see any major issues in the northern hemisphere during the early part of 2019 – prices will go into the stratosphere.
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