The Australian grains industry now operates in an exceedingly global market with numerous traders, consumers and producers.
Wheat trades in an open and relatively transparent marketplace with the majority of wheat produced sold using either spot or forward contracts. However, competitive offerings in commodity pooling are still available especially in regional areas where significant export surpluses exist. There is a sophisticated market in terms of the facilities and products available to manage wheat price risk. There is significant variation in wheat prices on a regional basis throughout Australia. In South Australia and Western Australia where significant exports occur, prices are more related to international values.
In the Eastern States and in particular NSW and Queensland, prices in good production years are also determined by movements in international values. However, in drought years, pricing can become much more domestic. Managing these price swings based on seasonal variation is critical to any marketing program for a producer or consumer of wheat.
While domestic wheat prices may not follow international values as slavishly as cotton or sugar (where more than 90% is exported), they do tend to correlate to some degree with US wheat futures which are a global benchmark for wheat pricing. The key elements to the pricing of wheat are US wheat futures (either Chicago or Kansas), the exchange rate and basis. Farmarco brings you unparalleled expertise in managing these elements.
Why manage wheat price risk?
Price risk exists throughout your business, whether it be input costs, interest rates, insurance or grain prices. Price received (more so revenue received) is impacted by the level of production and the price received for that production. Maximising both, or more so minimising the impact of adversity on both is a key element to long term profitability.
On the supply front, agronomic advances is one good example of attempting to minimise the impact of a dry year on production. Price risk can be managed also with the view of minimising the impact of adverse movements in prices for your production.
Wheat prices tend to be highly volatile one year to the next and in recent years this has been an increasing trend.
The example of monthly changes in APW prices Brisbane Port displays the significant price variability that impacts on the final price your receive. In the past five years the price has generally ranged between $200 and $370 - this is a significant range.
How does this impact you? Well, if you for example had 1,000 tonnes to market then the value of the crop would tend to range between $200,000 and $370,000 or a variation of $170,000. Considering the marketing costs of attaining better values is not high the dollars gained through marketing and risk management tend to flow right to your bottom line profit. So marketing can have a significant influence on your profit.
But that is just for starters. The more important aspect is that at $300 plus you have a high probability of being profitable while at $200 you have a high probability of making a loss. So gaining some price protection and good price levels goes a long way towards achieving longer term profitability.
At a point in time the wheat produced must be sold - this can be done either part forward sales and part spot sale, or utilising pools (either before, during or post harvest).
Products available for marketing and price risk management:
Forward cash price (wheat contracted forward in A$/t)
Spot contracts (wheat sold for prompt delivery in A$/t)
Basis “style” contracts (the ability to contract forward or post harvest but break the pricing up into its components of futures, basis and currency)
US Futures and Options contracts (used to hedge price risk) like CME and KCBT
Bank Swaps in A$ or US$ terms based on CME/KCBT futures (used to hedge price risk)
Pools (with pools you lose the ability to control your price)
Farmarco has been providing marketing and price risk management services to grain growers since 1985 and continues be a leading advisory firm. Farmarco’s services in grains range from cash brokerage right through to client advisory.
There are any number of reasons that wheat growers use Farmarco, however some of the common ones are:
Marketing is not easy and they want help
Marketing effectively is time consuming - there are many other aspects of their business that require attention
They like to have sounding board and a second opinion on the market and strategies
They prefer to let those who concentrate on the market full-time either have influence in their decisions or effectively do their marketing for them
At the end of the day they understand wheat is a high value commodity and managing price swings is important to longer term profitability