ASX Grain Futures and Options can help protect your grain input costs, especially during drought. As the grain industry faces further change and possibly greater competition the importance of a comprehensive risk management facility cannot be underestimated. The following list highlights, in no particular order, key issues for grain end users. It also lists whether there is a capability to manage the issues by using ASX Grain Futures and Options. Importantly, ASX is more than just a price risk management facility.
|Capability to Manage|
|Accumulation Issue||ASX Grain Futures||ASX Grain Options|
|Drought Price Protection||Yes||Yes|
|Deliverable Contracts||Yes||Not Applicable|
ASX Grain Futures and Options provide grain end users with a number of ways to manage their grain price risk. The risk for end users is rising prices. This risk can be mitigated by either buying futures contracts or buying call options. Many end users are keen to understand the difference between swaps and ASX Grain Futures. Unlike swaps, ASX provides a solution for all participants in the Australian Grain Industry. Using ASX industry participants can manage their; price risk, production risk, counterparty credit risk and foreign exchange risk.
If you are a grain end user, you can hedge your exposure to higher commodity prices by either buying futures contracts or buying call options. This is a key difference to swaps as they are priced around North American markets that do not reflect the fundamental supply and demand reality in Australia. The above chart demonstrates the difference between the ASX Milling Wheat futures contract for delivery in January 2007 (gold line) and the Chicago Board of Trade (CBOT) (red line) and Kansas City Board of Trade (KCBT) (blue line) Wheat futures contract for December 2006 delivery, in Australian Dollars per tonne.
The strong rally in local grain prices was due to the drought in Australia more so than the tight grain supply and demand equation globally. If you look at the chart from the 20th July 2006 onwards you will see that ASX rallied $60 AUD per tonne from $210 up to $270. At the same time, Chicago futures were barely unchanged and Kansas futures actually fell about $10 AUD per tonne.
The following chart demonstrates the premium in ASX Milling Wheat January 2007 futures over Chicago December 2006 futures in Australian dollars per tonne. If an end user hedged using a swap and not priced basis, the hedge would have returned $60 AUD per tonne less than a hedge on ASX.
Buying ASX call options is another way you can protect yourself from high grain prices. On Friday the 8th September 2006 the November 2006 Feed Barley $235 Call Option traded at $4. The buyer of this contract achieved a guaranteed maximum price (price ceiling) equivalent to $239 New South Wales/Victoria Port for the barley. On the 16th of November 2006, November 06 Feed Barley settled at $295.90. The value of the protection provided by the bought call option was $56.90/tonne ($295.90-$239).
As an end user you want protection from drought markets. Buying ASX futures or ASX call options will protect your business. Buying a swap priced on North American markets alone will not.
ASX Grain Futures are deliverable and delivery is based on the underlying NACMA track contract principles. As an end user you are understandably interested in securing physical supply. If held through to maturity bought positions on ASX will result in physical delivery within the networks of approved Bulk Handlers. If you are not interested in taking delivery within the system there is a trade facility available that enables you, with the help of your broker, to price grain on a delivered basis and simulataneously unwind open positions on ASX. This facility is called and "Exchange for Physical" trade (PDF 62KB).
The Delivery Period for ASX contracts is clearly defined and transfer of title only occurs if the funds have been lodged by the buyer. The ASX contract offering currently covers port zones in Queensland, New South Wales, Victoria and South Australia. It is up to the seller where and when (in accordance with the contract specification, during the Delivery Period) delivery is instigated. The buyer is allocated stock on a random basis. Because the ACH is the counterparty to all trades there is no 'circle trade' paper chase and associated delays in the transfer process are avoided. The ASX delivery process is facilitated through the ACH account with the accredited Bulk Handler and as such market anonymity is maintained throughout.
Many participants within the end user community prefer to keep their activities anonymous so that issues such as front running orders are avoided. Because the ACH manages counterparty credit risk there is no need for the trade counterparty to be disclosed as may be the case in the over the counter physical market. This ensures that you are free to trade the market as you choose and can do so safe in the knowledge that the market does not know which direction you may be coming from. This assists in creating a level playing field for all.
The volume traded on ASX has developed considerably in the past 12 months and has been consistent across Milling Wheat, Feed Barley and Sorghum. This is providing improved spread trading opportunities for both the intra commodity spreads (time or calendar spreads e.g. March Sorghum versus May Sorghum ) and inter commodity spreads (grade spreads e.g. Milling Wheat versus Feed Barley). ASX is working to improve the spread trading capabilities of the market which will further advance the market's price discovery process and assist grain end users interested in formulating least cost rations.
Hedged positions are of little value if the financial integrity of the seller is not managed and protected. The Australian Grain Industry has a chequered past when it comes to counterparty credit risk. To maintain the financial integrity of the market all positions on ASX are managed by the Australian Clearing House (ACH). Since the inception of ASX Grain Futures there has been more than five corporate failures in the grain industry, but there has been no default in the ASX market. Many of the defaults could have affected end user positions in the over the counter physical 'track' and 'delivered' markets. The majority also occurred during periods of high volatility i.e. drought, exactly when you do not need counterparty default. The settlement terms against deliveries made and taken on ASX is T+1.
The price traded for ASX futures contracts is a 'track' price. All prices that trade on the ASX are available to you. Market prices can be accessed in real time via vendor services, via this website on a 20 minute delay or you can receive the Daily Activity Report by email. The Daily Activity Report is issued in the morning following a trading day and details the values of all trades that occurred in both the futures and the options markets during that trading session.
It's time to learn more
Some industry participants mistakingly think derivatives are difficult to understand and deliver few tangible benefits. To the contrary, the benefits listed on this page are real. As the market develops and the industry learns more about how they can be used you will realise that it is not as dull or as difficult as you may have first thought. An important aim of this website is to provide a thorough education resource. If there is something you would like further clarification on please contact ASX.