GROWERS who wanted to capitalise on high commodity prices by taking out grain swaps with CBH Group have been stung by the market continuing to soar as the result of a multitude of global factors, with some farmers having overdrawn on their credit limits.
A grain swap is a financial hedging tool which involves selling (or buying) a futures contract on the Chicago Board of Trade (CBoT) and converting it into Australian dollars.
At the settlement date, either the bank (or whoever the swap is through) will pay the grower or the grower will pay the bank - who pays and who receives depends on how the market has moved.
The amount to be paid or received is calculated by the difference between the settlement price and the market price, multiplied by the total tonnes contracted.
The bank will compensate the grower if the market is lower than the fixed price, whereas the grower will pay the bank if the market is higher.
With prices at the end of last year sitting at what were then record highs, growers took out grain swaps as a way of protecting their revenue against potential declining commodity prices.
However, what no-one predicted was that prices would continue to rise and some growers now had no choice but to buy back their swaps at a loss.
Beaumont farmer Matt Hill bought a wheat swap, or 'swaption' for $350 per tonne with CBH last year.
Last week, he was informed by the co-operative that with CBoT prices hitting more than $600, he had blown past his credit limit and needed to buy back some of his swaps.
Mr Hill said while the situation was far from ideal, he had signed a legally-binding agreement with CBH and understood the co-operative was just doing what needed to be done.
"Unfortunately the timing is terrible, but the limit is the limit, the loss is the loss and the rules are the rules," Mr Hill said.
"My understanding is most farmers, including myself, understand the situation and while we obviously don't like it, it is what it is and when you take swaps like this, there is always a risk."
The market is undeniably extremely volatile and there are a number of factors playing into the soaring commodity prices.
Prices are at record highs which is positive for growers in most instances, but in the current situation it's very difficult for anyone to forecast or predict what will happen next.
CBH chief trading officer Jason Craig said the Russian/Ukraine situation was the dominant factor, however dry conditions in North America and India banning wheat exports had all contributed to higher markets.
"In markets today, there is significant government intervention across the world - up until a few weeks ago, India was a key exporter of wheat and then the government implemented a ban which has seen the market strengthen further," Mr Craig said.
"Indonesia banned palm oil which saw the canola market rally and that has now changed slightly as Indonesia is again allowing palm oil exports.
"We're seeing these types of events around the world which are having a significant impact on markets which we wouldn't normally see."
On top of that, there are also concerns over higher food prices and questions are being raised about whether that will affect demand over the medium-term.
"We're effectively exporting food inflation in some respects, so it'll be interesting to see if over the longer-term that demand starts to come down as food becomes too expensive across the globe," Mr Craig said.
While Mr Hill understands the reasons behind the price rises, he said for Australian growers the timing couldn't be worse.
Normally when growers want to get out of a hedge and buy the swap back, they're doing it during harvest and are able to sell physical grain straight away into a cash contract.
Meaning even if the market has risen above the point of the initial swap, the commodity price is high and they are able to capitalise on that in a physical sense.
Mr Hill said nine years out of 10 swaps worked out really well for farmers, but every now and then it doesn't and this was one of those years.
"I was educated in what swaps are and was aware that situations could arise," he said.
"I could get upset about it and decide to never do swaps again, but that means I lose out in those other nine years based on one bad experience.
"I think swaps are still a solid tool and the world markets will eventually return to some form of normality."
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