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I don’t like the grain price, but I need the cash!

Posted by Angus Brown on 23 November 2015
Angus Brown
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It’s not often headers are out in south western Victoria in November, but just yesterday a grower started harvesting Canola next door.  As with many growers, it’s decision time in terms of marketing. In terms of Canola, the $20 fall in price in the last fortnight has made the initial plan to simply sell Canola at harvest now a little less palatable. 

Wheat prices have also eased as we moved into harvest, with wheat values falling on the back of lower international markets. These falls in price present a conundrum for the growers who need cash, but don’t like the price.

Does that sound familiar?

Well, rather than simply holding grain and wearing storage and finance costs, growers do have alternatives to maintain exposure to price upside without forgoing cash flow. This is made possible by the range of financial products based on grain prices.

Using futures, swaps or options is daunting for the uninitiated. However, once you’ve done a few trades it's relatively straightforward. Basic strategies include a ‘cash and call’, or selling physical and buying futures or swaps.

Grain prices can be split into three components:

  1. International grain price – Fluctuations in international grain prices impact the Australian price. As an example, Chicago Board of Trade (CBOT) Wheat is the benchmark price for wheat prices worldwide.

  2. Australian dollar – the lower the A$, the better it is for grain growers as it makes our grain cheaper in international markets.

  3. Basis – this the difference between local and international prices.

Image - wheat cropWheat is currently presenting a real opportunity to sell for cash as two out of three components of the price (A$ and basis) are in the growers’ favour. Moreover, it is relatively cheap to gain exposure to CBOT wheat values, which are close to an eight-year low.

Maybe it’s time to brush up on grain derivatives, or at least call an advisor, while you are having a break.

Want to know more?

We have recently published a simple 'how to' guide on using a 'Cash and Call' strategy. In this guide, we look at the ‘Cash and Call’ strategy. This strategy can be used in markets when physical stock needs to be sold for cash flow, but the grower wants to benefit from any rise in price. 

Download 'How to use "Cash and Call" strategy'

Topics: Risk management, Grain market / grain price, Bank Swaps

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