Fast forward to harvest.

The Detail

The focus is now firmly on the coming harvest. The seeding rigs around the country are either in operation or getting set up. Whilst the job at hand is getting the seed drilled into the ground, the marketing task starts (if not already).

In an earlier morsel today, I had a look at basis around the country for old crop. Whilst this is important for those remaining onto old crop, its not much value for looking down the horizon to harvest.

Basis or futures?

The majority of farmers in Australia don’t use futures (or swaps), they use flat price contracts. Flat price is the physical price which you are offered, which combines futures, fx and basis. However at times it is an effective solution to separate your pricing.

There are many strategies, but at its most basic, if basis is low, sell futures and if basis is high sell physical.

The table below shows the historical basis between Chicago wheat futures and local physical pricing for APW during November.

Whilst basis does move between positive and negative, generally, harvest basis has been at a premium for most of the period 2010 to present.

We can see that the basis between physical and the various exchanges is considerably lower than the basis which would typically be received during the harvest period.

1. Lock in physical contract with trader. This will lock in all the components of pricing, fx, basis and futures. This will remove all risks to do with pricing, and you have absolute certainty of the price which you will receive.
2. Sell futures at the prevailing rate either directly through a broker or a swap through the bank. This will protect you from the futures (fx*) price falling, but will leave you exposed to basis.

If basis falls further, then you will lose. Still, suppose basis rises to return to typical levels. In that case, you will receive that benefit when you come to close your futures and sell physical at harvest.

Strategy 1 will leave you without any price risk, and no further thinking. Strategy 2 retains some risk, but the potential for leaving less on the table. It will come down to risk appetite which strategy is used.

*FX can be left open or locked in, but that is a discussion for another day.

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