Strong record of hedging grain post-harvest

Strong record of hedging grain post-harvest

Opinion
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Prices are high due to the elevated global wheat market as our prices are actually the cheapest globally.

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GROWERS are facing a grain market that is offering them a rare combination - average to above-average (on the east coast) yields and above-average prices.

If you multiply the two as a very simple measure, it will be a very good season financially.

Prices are high due to the elevated global wheat market as our prices are actually the cheapest globally.

So growers need to decide how much of this opportunity they want to capture now via harvest sales and how much they want to hold, looking for higher prices in the future.

If we look historically, the returns on offer by holding grain into the post-harvest market (unhedged) has not offered us a sufficient return (net of costs like storage if applicable and interest costs) to do so.

The chart provided illustrates this fact, as it shows the KWI APW1 FIS average price over the past 12 years, net of interest costs.

As you can see, typically the Kwinana price tracks along sideways to lower, not offering a holder any benefit of being exposed to the post-harvest market.

This is because the offshore market typically falls over the same period, putting pressure on Kwinana prices and stifling any benefit of holding unhedged post-harvest.

The other option growers have is to hold wheat into the same post-harvest market but protect against the risk of a falling market by hedging.

That is to hold our grain in Australia and sell the offshore market, exposing our grain, not to the outright movements of the global wheat market, but the relative strength/weakness in our prices.

As you can see in the chart, on average our basis (the difference between our wheat price and an offshore wheat price) has typically strengthened post-harvest.

This strategy outperforms both selling at harvest and holding post-harvest unhedged, as it protects against the fall in offshore prices but leaves us exposed to our market which typically strengthens relative to global prices as our season progresses.

The takeaway from this is if we use historical market performance as a guidepost, it has not paid dividends to have a big percentage of our wheat exposed to the post-harvest market without having a corresponding sale in the offshore market (hedge) to protect against downside risks.

Despite the absolute prices of wheat falling the longer we hold, our relative strength improves quite significantly over the same period.

So, for those growers looking at all the opportunities for the wheat market to rally next year, and there are plenty (more than most years), we want to be careful leaving a big percentage our production exposed to higher prices from here as history suggests it will disappoint.

Holding our grain and selling offshore instead and being exposed to our relative performance has a strong track record of performance over the long term.

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