Managing Weaker Harvest Prices
Managing Weaker Harvest Prices – Nov 2020
The Weakest Sellers are Always at Harvest
As harvest progresses throughout Australia in what is expected to be the second biggest winter cereal crop on record, wheat prices have fallen as harvest rolls on. At time of writing, wheat prices on face value remain healthy across the country, especially in the eyes of those looking to harvest an above-average crop. APW1 is over $305 port in most states (~$20/t premium for WA). This is getting most growers an attractive return, and many will be eager sellers at these prices, but it’s important to the see the forest for the trees! Although this season, like every season warrants a level of harvest cash sales, the current prices make Australia the cheapest wheat on the global stage. The primary reason our wheat prices are so cheap relative to our major competitors is due to harvest selling pressure, as the crop is big and the price is attractive, bringing surplus supply to the market and putting downward pressure on prices as a result.
Understanding Relative Value is Important
When looking at prices, we must always consider their relative strength or weakness – which is to say, how does a $305 port price in front of me stack up versus global wheat prices. If its significantly higher i.e. local prices are trading at a big premium (strong basis), we are more inclined to sell domestically given the risk this premium deflates as we are less competitive into the export market. If the opposite is true and we’re only a small premium (or even a discount) then we are better off selling offshore, or hedging using an offshore futures exchange and waiting for our price to increase relative – also known as basis strengthening.
How do current wheat prices stack up relative to the rest of the world and when we look at world prices, what are we comparing against. Firstly, we’re generally comparing ourselves against the US futures market (both CBOT and Kansas exchanges) which the world growers, exporters and traders still use as a proxy for global wheat prices. Secondly, and more importantly, we need to compare ourselves against our exporting rivals into the likes of South East Asia (our biggest wheat customer). The second metric is the most important given Australia exports most of its wheat, so our ability to make sales into offshore markets is paramount to supporting prices.
The good news is we are cheap relative to our rivals. If you convert current Australian wheat prices from port to delivered into South East Asia, we are cheaper than Russian milling wheat (our main competitor) by quite a margin, plus our standard quality and moisture is better. In fact, we’re substantially cheaper than even Argentina, and given the higher quality of our wheat, and the tough season they’ve endured, it’s likely we’ll be the origin of choice in 2021. Being the cheapest wheat into our export homes tells us that, outside of some short-term potential harvest pressure and logistics constraints (mostly on the East Coast), our prices don’t have much downside relative to the rest of the world i.e. our prices cant sustainably fall much from here without the rest of the world prices also falling.
When we look at our prices relative to the US wheat futures markets, we are also cheap, with our price relativity to CBOT/Kansas at the lower end of their historical trading ranges. The chart to the right illustrates Port Kembla APW1 (FIS) vs Dec-20 CBOT converted into AUD (basis being the difference between the two). If we look back at the last 10-12 years, rarely have we been this cheap vs CBOT (worth noting this is also driven by CBOT being at such a premium to other exchanges). This presents an opportunity, as it did during the 2016/17 harvest to hedge offshore and allows growers to participate in strong global prices but maintain their ownership of basis while waiting for a stronger relative domestic market post-harvest.
The Post-Harvest Hedging Strategy
So, it is always important not to take prices simply at face value, as even what looks like a good price, might be a distraction from a better opportunity to maximise our grain marketing returns. By evaluating our relative strength or weakness, we can more accurately assess the risk/reward of focusing our sales in the offshore market (i.e. hedging), which overtime has offered us both improved returns but also a safer avenue to holding grain post-harvest. Market Check’s Strategic Program has been implementing a hedging strategy for Australian growers under a pool structure to participate in relative strength post-harvest since 2012 with strong average returns. This post-harvest hedging strategy can be executed through Market Check’s Strategic Program for a one-off management fee of $7.50 per tonne.
Why Pooling can Add Value this Season
Given the large East Coast crop, the market will not be able to buy the whole crop at harvest. This is due to many reasons which include a lack of export capacity over the next few months, balance sheet and risk limit constraints as well as more supply coming to the market when global demand is only looking to cover their next couple of months requirements. This is why it is important for a managed program provider to offer Australian growers a post-harvest program to manage the downside price risk whilst allowing participation in any relative strength in Australian wheat prices post-harvest. Selecting the right pool provider is paramount. Growers should select a pool based on their track record of experience managing pools, processes and policies in place to protect pool equity such as credit insurance, a clear strategy mandate and the most important criteria – no conflicts. A pool provider working only for the grower without any potentially conflicting trading positions is important.
Market Check’s Strategic Program Gains Traction
Market Check has been running its nationally trusted Strategic Program since 2012 with strong average returns across all states. The pool implements a dynamic hedging strategy utilising a mix of international futures exchanges to protect downside in prices post-harvest whilst allowing participation in any domestic market strength relative to offshore markets. The Strategic Program is managed by a team of experienced professionals who work only for grower participants. All sales are insured, protecting grower pool equity and monthly valuation reports and bi-annual webinars are distributed to participants to maintain transparency and trust with clients. The Strategic Program has been playing a vital role in the grains industry since 2012, offering growers a safe actively managed post-harvest program to take the pressure off and give growers disciplined exposure post-harvest markets.
Editor: Nick Crundall, Head of Strategy & Research, Market Check