Tag: Grain

At this time of year, those lucky to have grain on hand will now be deciding whether it is best to sell their grain or hold on for higher prices. There are many ways of deferring pricing, and give exposure to the market at a later date. This short article will provide summaries of easily accessible options.

Storing to sell

Exposure: Basis & Futures

The obvious option for deferring pricing is to hold onto your grain and sell at a later date. This can be carried out either through central storage or through your own on-farm storage system.

Key considerations:

• Remember to calculate your storage costs and interest charges if storing in the system, this amount has to be recouped to make it worthwhile.
• Place a realistic price on your time, capital, fumigation and interest when storing on farm.
• Whether your on-farm storage is in a good enough condition to make it to the targeted sales timeframe.

No Price Established contract (NPE)

Exposure: Basis & Futures

 The NPE contract comes under a number of different product names through different providers, however all perform the same function. The purpose of the contract is to provide traders access to grain, when the grower doesn’t like the price. The grower is then given a predetermined timeframe in which to secure their price.

Key considerations:

• Check what the product fee is.
• Is there an advance?
• Check how the pricing is established. What is the methodology if the trader is lower than the market?
• Do not use an NPE if the contract is only based on the trader’s price.
• Maintain a close eye, and remember that it is a time-based contract.
• Check whether storage and handling fees still apply.

More in depth information:
http://blog.mecardo.com.au/grain-canola-npe-contracts-the-simple-facts

Cash and Call

Exposure: Futures

The cash and call strategy involves the use of derivatives, but is not particularly complicated (guide on link below), and can be transacted through most banks or through a broker. The cash and call strategy is suitable when basis levels are strong, and futures are low. At its simplest, the grower sells his physical grain and then takes out a call option, which provides a benefit if the futures market increases in value.

The call option works in a similar way to an insurance, where the grower has a known worst-case scenario, in exchange for paying a premium.

In the Cash and Call strategy, the grower has a known cost (Premium) and for this cost has exposure to future favourable price increases. If the market price of the Call Option does not increase, only the Premium is lost.

Key considerations:

• Is the market structure favouring removing basis exposure, whilst retaining futures potential?
• Does your bank have the capacity to offer these instruments?
• There are no further storage costs in this strategy.
• The market has to climb higher than the premium to provide a positive pay-off.
• The premium will change dependent upon time, and strike price.
• There are some pool providers offering managed products which are based solely on the cash and call strategy.

 

More details:
http://blog.mecardo.com.au/i-dont-like-the-grain-price-but-i-need-the-cash

 

Buying a swap/futures contract

Exposure: Futures

The traditional method of utilizing a swap, would be to sell a swap prior to harvest to lock in a futures price, and then unwind the swap by buying back the swap from the bank at or near harvest. Although not common practice amongst farmers, it is possible to buy a swap/future contract.

It is possible with many banks to turn it around and instead of selling a wheat swap, buy a wheat swap. Let’s say for instance the current basis levels were high, and futures were low. It would be possible to sell your physical grain and lock in the basis, at the same time as buying a wheat swap.

The buying of the swap would give an exposure to the futures market. Therefore, if the futures market rallied you would participate in any upside. In an ideal world you would then close out your swap position when you had reached your target price, and with the addition of the basis already captured, would be your overall price.

Key considerations:

• Is the market structure favouring removing basis exposure, whilst retaining futures potential?
• There are no further storage costs in this strategy.
• Some banks will not allow a grower to buy a swap, and those that do will likely want to see a physical sale contract. This is to ensure that the instrument is being used as a hedge and not for speculative activity.
• A direct futures contract with the exchange will be cheaper but has the potential for margin calls.
• Should the market fall further after the swap is taken this strategy has the possibility of loss, further eroding the final overall price.

More details:

http://www.mecardo.com.au/commodities/analysis/turn-grain-swaps-around.aspx

Pools

Exposure: Dependent on pool strategy

Prior to 2008, wheat pools were the primary marketing route for the Australian growers. This has changed dramatically and <30% would be expected to be marketed through managed programs. The breadth of providers and products has however ballooned to fight over the remaining pool participants.

At its most basic, the pool is a product where growers provide a manager with tonnage with the expectation that they will manage this to provide a better return than they could achieve themselves. Typically, an unpriced scheme or product would be considered a financial product and require an Australian Financial Services Licence (AFSL), however an exemption for grain pool has been extended by ASIC.

What to keep in mind when selecting a pool:

• Does the pool strategy meet your requirements and your own view of the market?
• Do you think the pool provider has the experience to operate the pool?
• Does the pool provider have an AFSL? This gives an indication that the provider must take compliance extremely seriously.
• What are the payment schemes, and how do they work with your taxation and cash flow requirements?
• Pool providers put together some flash marketing, ignore this.
• Check past history, but remember that past performance is not an indicator of future performance.

Dawn has broken on 2018. The start of a new year brings fresh possibilities, and a few positive signals have started to appear in the market. In the zodiac calendar 2018 is the year of the dog, let’s hope that its wrong and we are in the year of the wheat bull.

So far in 2018 the wheat futures market has shown some positive signs. In US¢/bu. Chicago futures (figure 1) have gained 3% since boxing day, although the A$ has removed most of the shine from the rise. The market is currently starting to price in weather risk into the US winter wheat crop, after a series of cold weather events is likely to have caused some damage since inadequate snow cover was in place.

These weather events come on the back of a USDA crop progress which is particularly bullish (figure 2). This chart shows the current percentage of the crop rated as good to excellent. As we can see, with the exception of Colorado, all states are showing substantial year on year reductions in the good to excellent category. It has to be taken into account that this rating was determined prior to the cold snap, and it is liable to be downgraded further.

At a local level, after relatively lacklustre grower selling throughout, harvest sales were more forthcoming between Christmas and New Year. This increased selling pace has led to a depreciation in basis levels (versus Chicago). In figure 3, we can see the extent of the fall in basis since just prior to Christmas, which was largely inevitable and was discussed in following articles:

Lock in premiums, keep exposure to the market

Wheat seasonality: Imitation is the sincerest form of flattery

Let’s look back at historical basis

It remains to be seen whether basis levels will improve as the festive season draws to a close. At present most businesses are still operating at relatively low levels, with many not returning until the 8^th January.

Next Week

The market will continue to examine weather risks due to cold and la nina in the northern hemisphere. I don’t expect big jumps in the coming week with the exception of potentially speculatively driving rallies.

It will be interesting to see the direction that basis takes this week; will grower selling pace result in further falls or will more buyers come to the table and drive it north?

We are just on the brink of silly season, where the majority of the western world will effectively stop. There will be skeleton staff in most organisations (including Mecardo), and there will likely be little new activity. In this week’s comment, we have a look to see if the market has provided any pre-break cheer and joy.

This week saw the end of trade in the December 2017 CBOT futures contract, and we thought it was worthwhile highlighting the performance of this contract. In figure 1, we can see the price from the start of trading in July 2015 to present. Apart from some northern hemisphere jumps mid-year in both 2016 & 2017 the market has been on a downward tradgetory.

In Australian dollars the December contract closed at $188, $90 below the peak achieved in July 2017. Growers who participated in a swap at this level, will be rewarded with a substantial return due to the swap profit and strong basis levels.

The Australian dollar regained strength this week (figure 2), on the back of stronger than expected jobs data. The Fed reserve also increased rates however have pointed to three rate rises in the coming year, a more gradual increase than expected.

The USDA released their December WASDE, which was as expected. The December report typically offers little in the way of surprises and is largely an adjustment exercise. In reality, if you want an update on the December WASDE, just read about the November one (click here).

The report pointed towards continued high stocks (figure 3), which unless something goes wrong in the northern hemisphere will lead to continued depressed pricing. The USDA interestingly maintained production in Australia at 21.5mmt, which will have to be adjusted in future reports.

So overall, this week there hasn’t been much data to provide joy this Christmas, but all it takes is an issue in the north to get improvements in price.

Next week

An interesting place to keep an eye on is Ukraine, which has very cold weather approaching but with little in the way of snow cover.

We set out trying to work out what the heavy rain which is falling across all eastern cropping zones over the coming days will do to prices.  It’s not as simple as looking back at 2010-11 when harvest was delayed, as that was a bumper crop, and this is not.  We’ll have a look anyway.

Figure 1 shows the impact of heavy December rain back in 2010 on feed wheat prices delivered Melbourne.  Over the course of two weeks the price lost $70/t as shot and sprung wheat was harvested and overwhelmed feed users.  Basis to CBOT moved to an all-time low of around -$70/t, as CBOT rallied due to the now tighter supply of Milling Wheat coming out of Australia.

Due to the much tighter total supply of wheat, we don’t expect such a dramatic fall in feed prices this year.  We could however see a spike in milling wheat prices, as already low supplies are exacerbated by downgrades.

The market has already started to move.  APW Geelong rallied $5/t today, up to a 7 week high of $265/t.  In PortAdelaide APW gained a little ground, but remains at $250/t.  SFW delivered Geelong hasn’t moved yet.  In fact it was a little yesterday, at $228/t.

In international markets price were down this week, Dec-17 CBOT hit a contract low 411¢/bu (figure 2).  In AUD terms CBOT is at just $202/t, down around $8 for the week.  Basis just keeps getting stronger.

The week ahead

As we outlined in the Canola analysis earlier in the week, it looks like a hold at the moment.  Sales of milling wheat, for those fortunate enough to have it in store already, can probably and wait to see how prices wash out after the rain.  Feed grain prices are unlikely to find any strength from here, so if looking for cash flow, feed barley and wheat would be grains with the least upside, and most downside.

The Chicago futures market was closed for the thanksgiving holiday, causing the market to be quiet. In this update we take a look at pricing, and radioactive issues in Russia. We know the Russian crop is growing, but is it also glowing?

The markets were quiet this week, as they celebrate thanksgiving in America. In figure 1, we can see that the futures market continues to trade in a narrow range of around 10¢/bu (A$5/mt). The lack of fresh news is likely to continue trading this range for the rest of this year, with the worlds production now largely locked in.

The one piece of potentially bullish news, is the BOM prediction of a La Nina event over the summer. They are predicting that this event will be weak, and likely to lead to heatwaves in eastern Australia as opposed to the usual La Nina effect of wetter conditions. Typically, a La Nina event can cause dry conditions in the US cropping belt (see map), however is unlikely to have a significant impact unless it continues through into our Autumn.

The local harvest is not without its issues, we have seen hail in Esperance & rain in SA/VIC challenging farmers patience. The pricing around the country has flatlined, with little in the way of movement since the beginning of November (figure 2). Interestingly, the major frost event in the western districts of Victoria has had little in the way of impact on the Geelong price. The question will be whether there is enough grain to avoid a price rise, or is the trade underestimating the impact?

The Russian crop continues to place pressure on the wheat market, with black sea origin wheat winning nearly every tender since September. In figure 3, the wheat production from Ukraine, Russia and Australia are plotted since 1988. It is clear that the advancements in the Russian crop through a combination of opening new land, agronomy and technology have led to a stratospheric rise in production.

It is growing, but is it also glowing? It was revealed that a radioactive substance ‘Ruthenium 106’ had been detective in the Ural Mountains at 1000 times higher than normal levels. This indicates the likelihood of an incident at a Russian nuclear facility. It is expected that although high levels, that it is not at the degree to impact lives. There were rumours of traders covering short positions, as this news developed. However, it is unlikely that this event will cause a huge impact to the Russian grain machine.

Here’s a joke for the weekend:

What did the nuclear physicist have for lunch?

Fission chips

I don’t envisage the market reacting to the Russian radiation story, so I wouldn’t be hoping for a price rise based on this.

The futures market is likely to continue treading water next week, as there are limited drivers in the market. At a local level basis levels remain small, but there could be potential for price rises in Geelong as a result of the realisation of the extent of the frost damage in the Western Districts.

The market continues to trade with a lack of strong fresh information. The real focus now is on what is happening locally. We continue to sit at strong local levels, but how long will it last?

On the global stage, Chicago wheat futures took a tumble this week (figure 1), returning to levels from the beginning of the month. The market continues to trade on the large global stocks, and eyes will be on export numbers to determine how quickly end-stocks will be depleted in the major exporters. As it currently stands without increased weather woes in the northern hemisphere there is likely to be little in the way of upward momentum.

At a local level, prices have been trending downwards to flat (figure 2) during November. However, across the board, APW1 prices have fallen substantially since the beginning of October.

• Port Kembla -$39
• Geelong -$30
• Adelaide -$18
• Port Lincoln -$20
• Kwinana $-14

On the first weekend of November, an unseasonal frost event impacted Victoria. Our discussions with numerous consultants point to major losses to cereals. This is yet to be reflected in pricing with Geelong trading lower than the beginning of the month.

During October strong rainfall events have added some confidence to the summer sorghum crop, which reduced the concerns that domestic feed consumers had. This has led to a fall in basis levels (figure 3), especially in the areas which are within a potential drawing arc of NNSW/SQLD. We have highlighted the risk in pricing levels falling as we advance into harvest, these are worth re-reading.

Lock in premiums, keep exposure to the market

Wheat seasonality: Imitation is the sincerest form of flattery

Let’s look back at historical basis

What does this mean?

The key concern we see, is the status of the crop in Victoria. It has been two weeks since the major frost event, which is considered a 1 in 20-year event. The crop was looking fantastic in the Western Districts, and to see it fail so close to harvest, is completely heartbreaking and devastating. The full extent of the damage will be only be realised when the header goes into the crop.

The US Department of Agriculture released their World Agricultural Supply and Demand Estimates overnight. In this week’s comment, we will take a look at the impact on wheat, and report on new import barriers being erected in India.

In last week’s comment, I mentioned that this report would be released, and that there would be little in the way of surprises. This has largely been the case, with no major changes occurring. Unsurprisingly, the Russian crop was further increased by 1mmt, to a record wheat harvest of 83mmt. All in all, without beating around the bush, we are still in a world with a glut of wheat (fig 1). There are arguments that a large proportion of this stock is in China and not available to the export market, however the reality is that global prices are likely to stay depressed for some time.

The USDA have a relatively poor performance when it comes to forecasting Australia, and we tend to believe that the WASDE is usually around 2 months out of sync with reality. In table 1, the WASDE details for Australia are detailed. The items which stand out for future revision for me are:

• Beginning stocks: These are likely too high, and after such a strong export program this is likely to be revised back close to 5-5.5mmt.
• Production: USDA remain on the high end of the spectrum when it comes to Australian forecasts. A final production figure closer to 7mmt is more likely.
• Exports: An export program of 17.5mmt is extremely ambitious for the coming year, and when production and beginning stocks are brought back to reality will be a hard task to complete.
• Domestic consumption: The domestic consumption figure is sitting on the previous ten-year average, however this year there are a record number of cattle on feed.

So how did the WASDE report impact the markets? The answer is unfortunately for growers is minimally (figure 2). There was little in the way of surprises, and the report largely met trade expectations. After some short covering in the lead up to the report, the market regained it’s losses and is 5¢/bu or A$1 higher than this time last week.

A couple of weeks ago I flagged in the comment, “An Indian Summer”, that the Indian government was likely to implement a 20-25% import duty on wheat. In the past two days, the import duty on wheat was set to 20%. This is in place to discourage imports of wheat, and give positive price signals to local growers. In figure 3, Indian wheat futures on the NCDEX exchange are plotted, and we can see that yesterday the market started the day at A$345 shortly hitting A$353, and ending the day up A$3.

Although we don’t regularly examine pulse markets, a massive duty of 50% has been applied to peas. This is largely to disrupt the import from Canada, but for pea growers in Australia this will be felt.

What does this mean?

The November report is out of the way, and the December report is largely void of any worth. This means that by now and February the only influences on the global market from a fundamental point of view with any value will come from either Australia or South America.

We are going to have to wait until the northern hemisphere weather risk period to see any substantive rallies in the futures market. This does however provide opportunities for consumers to hedge values, or for growers to take out long swap positions.

Australian is on the cusp of being full blown harvest, with all states (ex Tasmania) showing some activity. In the coming weeks, harvest proper will be upon us, and we will start to see how accurate the crop forecasts have been.

The futures market saw a sharp drop mid week, with the December 2017 contract falling to contract lows (fig 1). This follows the seasonal pattern which has emerged over the previous two years “Wheat seasonality”. The lack of fresh data, along with a global glut of wheat has given rise to a continued bear market. However, overnight we saw a strong rally (fig 2) which recovered most of the losses of the past few days. This was likely a result of speculators taking profits from short positions, potentially (or hopefully) a sign that the market may be reaching a floor.

The bulk of the harvest is currently centred around NNSW, Queensland, Geraldton & Esperance. In the coming weeks it will move into full swing in the other areas. At present there have been some surprises, with growers getting better results than expected in Qld & NNSW, however the outcome is still going to be well below average.

In local pricing (fig 3), the benchmark APW1 price has seen falls of 1-2%, with South Australia seeing the largest falls. The market however continues to show very strong basis levels, and there are potential downside risks as outlined in our article, “Let’s look at historical basis”. The lack grower forward selling this season, could lead to a pressure on harvest pricing, which we have seen in recent years.

As more certainty on production comes to light, it is advisable to consider trading some physical wheat, as a cover for if basis levels do fall.  At present due to the unknown quality profile, it is prudent to continue to utilise multigrade contracts.

Next Week

In the next week the November WASDE report will be released, it is not expected to bring many surprises and the market will continue to have a neutral to bearish tone. It is unlikely that large market rises will occur prior to the start of the northern hemisphere risk market.