Grain Pools – The Australian Story
Market Check founder Brett Stevenson reviews the history and evolution of grain pools in Australia.
The economic impacts of the 1929 share market crash entered the Australian grain marketing arena when eastern Australia became dramatically short of flour. At the same time the price offered to Western Australia growers from South Africa was far more attractive than exporting flour to the eastern states. The government’s response was to establish the Australian Wheat Board to force Western Australia to pool their grain/flour with Eastern Australian growers so the Australian general public would have enough flour for making bread. This marked the commencement of the Australian Single Desk (Australian Wheat Board). The concept was reinforced with the commencement of the Second World War in 1939. Food security for Australia was paramount at that time.
Government policies of regulating markets for agricultural products became commonplace after the Second World War, for example; the state grain marketing boards for all the other grains, State egg marketing boards, the Wool reserve price scheme, Colonial Sugar Refineries etc.
The commencement of globalisation in the 1980s and the freeing up of all financial markets, including the Australian dollar, rang the bell for all these marketing arrangements. Global government policies of allowing the free market to determine the price and encourage global trade became the order of the day. Most of these government supported marketing arrangements disappeared in the 1990s, however, the Single Desk for wheat didn’t end until March 2008.
After 2008 a number of grain marketing organisations continued with the concept of wheat pools, with no strategy mandate, to cater for those who prefered the convenience of someone else marketing their grain and for those that believed a grain pool could deliver a premium above the market. Most of these Pools have disappeared in the past decade.
So, what has risen from the ashes of Single Desk and grain pooling in Australia? There are many reasons why grain growers can benefit from working together to market their grain. For example;
– to access markets which can’t be accessed by an individual grower,
– to facilitate sales to consumers or traders who don’t want to deal with individual growers,
– to create volume liquidity for an exporter to make a bulk sale overseas,
– to provide growers with access to financial risk management strategies which use futures, options and exchange rate products which are expensive or complicated for a grower to access as an individual,
– to absorb and defer harvest sales to alleviate downward selling pressure on the market and allocate sales into the post-harvest market when selling pressure has eased.
– to provide growers with access to particular risk management or marketing strategies which are better managed in a group by a professional.
Pools driven by a strategy mandate like the above are now generally referred to as Managed Programs. Market Check has been offering Managed Programs since 2011. The first program Market Check offered was the Strategic Program. Market Check members were wanting to access our harvest and post-harvest grain marketing strategy without having to administer financial products such as futures, options and exchange rate contracts. Other programs followed such as the Cash and Call program which allows growers to access a strategy of selling at harvest and replacing with a portfolio of Call Options to provide an additional return if the market continued to rise after harvest. In 2016 we ran a Managed Program for oats for a group of growers in Victoria enabling them to take an advance against the grain whilst waiting for the market to improve. Last harvest we opened a Managed Program for Barley to allow growers to access a strategy of protecting the return against a stronger Australian dollar whilst waiting for more favourable market conditions.
Since deregulation growers have been gradually learning to manage their market risk by spreading sales over the production and post production period. The deregulated market exposed growers to the volatile world market as well as the domestic drought markets in poor production years. No one knows when the highs or lows of the market are going to occur so it logical to spread out the risk by selling some prior to harvest, selling some at harvest and selling some after harvest rather than trying to pick the high point to sell all the crop. This philosophy is similar to that used for investments. No one knows which companies are going to perform best so they spread out their risk using a portfolio approach.
Over time more growers have become adept at using our Advisory service to manage their own risk by selling some before harvest with the use of Swaps, Options or Forward contracts, selling the right grades and locations at harvest and holding some in storage, hedged and unhedged, to access improvements in basis or flat price.
Towards the middle of the 2010/2020 decade many of our members who hedged their own grain with bank swaps found the product increasingly high maintenance, expensive and/or the bank withdrew the product. These growers began using our Strategic Program to access a post-harvest basis strategy. As a result, the Strategic Program became conflicted between a strategy of providing access to our harvest and post-harvest strategy and accessing an improvement in basis post-harvest.
To solve this dilemma, we have restructured the Strategic Program. The Strategic program will follow our harvest and post-harvest strategic guidance and we are commencing a new Strategic Basis Program mandated to manage a post-harvest Basis strategy. We are also starting a new program called Strategic Cash which provides growers with access to our cash only marketing strategy with the flexibility of taking an advance or deferring payment until after the 30th of June the following year. Our Cash & Call Program will remain unchanged.
This restructure now allows growers to balance our Managed Programs with their cash marketing programs to create their own tailored risk management approach. This innovation combined with changes to our Agency and Advisory service in 2019 maintains Market Check as Australia’s leading independent grain marketing advisory company.
Editor: Brett Stevenson, MD & Founder, Market Check