WHETHER it is making the most of a disappointing harvest or capitalising on a good season, farmers are being urged to take care when formulating their marketing strategy this year.
Tom Basnett, Market Check general manager, said farmers had to weigh up a volatile domestic market and the potential for the current strong basis to come back when making their minds up regarding their grain sale plans over the next few months.
“The domestic market is volatile, and this will require a careful balance of cash sales, hedging and incorporating options this year,” he said.
Mr Basnett said while there was strong demand for domestic grain, driven primarily by feed grain users in southern Queensland and northern NSW, where the winter crop is markedly below average, there was no guarantee the premiums would remain.
“Basis is currently strong, although off its highs, but there is a risk basis could weaken further during late spring/harvest.”
Mr Basnett’s comments have proved prescient this week, with Aussie grain values tumbling, primarily on the back of rain in the northern cropping belt, which has some within the industry factoring in a larger summer cropping plant.
However, he said even with a reasonable summer cropping season he expected a positive basis to continue at least until the 2018-19 harvest due to very tight carry-over stocks, poor production, inelastic export demand and continued strong domestic demand.
Even if there is a sorghum crop, he said domestic grain users would be rationing their usage.
“The whole market, from the Darling Downs to WA, will need to be in rationing mode all year,” Mr Basnett said
“It will be a long 12 months for consumers of Aussie grain.”
Mr Basnett said growers could take advantage of this through basis hedges.
“A long basis (hedged) position still has its place this year although timing and the correct positioning (grade and location) is crucial.”
He said the cash market had appreciated since last harvest’s lows, which plumbed depths unseen for a decade, but added growers would have to look beyond the headline figure if they were looking at selling for cash.
“Selling for cash is more attractive than in previous few years, but an understanding of grade/location spread dynamics is crucial in determining which market to sell,” he said.
“While basis remains strong, a cash-and-call strategy will be more attractive this year because when our market is stretched and approaching import parity, the biggest potential for a rally is in the offshore market.”
Mr Basnett said while volatility in options is cheap, the strategy was not as simple as just selling for cash and buying calls.
He said growers needed to understand the dynamics of the particular hedging mechanism they planned on using.
“Some futures markets are trading strong carries in deferred contracts, and this is an important consideration.
“Some futures markets have more upside potential than others.”
Mr Basnett said to create an effective cash-and-call strategy famrers had to have an active management of a portfolio of calls options, with careful consideration of inter-market spreads and correct contract selection.
Historically, due to the single desk marketing strategy, Australia did not have significant intra-locational spreads.
However, this has changed and this year is a prime example, with Queensland wheat values trading at close to $100/t over South Australian prices at times during the season.
Mr Basnett said growers needed to be aware of such spreads.
“Price spreads between locations are volatile and are a crucial consideration when approaching this year’s market.”
He said if exploited correctly, the spreads could work in growers’ favour.
“For example, if northern markets push to a spread which prices execution from the south, then there’s little upside in holding the north.
“On the flip-side, if SA origin is pricing northern markets, then selling SA isn’t desirable.
“Understanding these dynamics and having sales in appropriate locations will be important.”