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AGB310 > Storage Function International Prices And Futures Markets > Flashcards

Storage Function International Prices And Futures Markets Flashcards

1
Q

What are 3 grain storage options?

A

i. On farm
ii. Bulk handling system
iii. Private storages

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2
Q

What are the advantages of On Farm Storage?

A
  • Quick turnaround when loading
  • Ease of out-loading
  • Ability to fill buyer short positions
  • No ongoing storage fees (warehousing)
  • No receival and out-loading fees
  • Opportunity to “blend” grain effectively
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3
Q

What are disadvantages of On Farm Storage?

A
  • Expensive investment in capital
  • Harder to segregate quality
  • Storage risk
  • Inability to access track markets
  • Increased labour costs
  • Increased time investment
  • Cost of grain treatment
  • Inability to access online/digital marketing options
  • Restricted access to buyers
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4
Q

What are advantages of Bulk Handling System?

A
  • No upfront capital investment
  • No storage risk
  • Ability to access track buyers
  • Ability to easily segregate and guarantee quality
  • Ability to access digital & online marketing options
  • Ability to borrow against warehoused stock
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5
Q

What are disadvantages of Bulk Handling Systems?

A
  • Ongoing expenses (monthly warehousing)
  • Restricted access to out-turn grain
  • Inability to sell into delivered markets
  • Slow turnaround times at harvest
  • Inability to handle ‘boutique’ grain
  • “Blending opportunities” restricted
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6
Q

What are the advantages of Private (Independent Storage)?

A 
• No upfront capital investment
• No storage risk
• Ability to easily segregate and guarantee quality
• Some ability to handle ‘boutique’ 
grain
• Quick turnaround (usually) at harvest
• Reasonable access to out-turn grain
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7
Q

What are disadvantages of Private(Independent Storage)

A

• Limited access to buyers (usually)
grain
• Ongoing expenses (monthly warehousing) • Restricted access to delivered markets • Some counter-party risk
• “Blending opportunities” restricted
• Limited ability to access track buyers
• No access to digital & online marketing options

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8
Q

What are the sources of Risk & Uncertainty?

A 
Risk is the uncertainty of an outcome. • Production risk
• Delivery and quality risk
• Counterparty risk
• Price risk
• Spread risk
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9
Q

What are the marketing tools to manage price risk?

A

1.Spot/Cash market (spot market US term) the simplest method of selling – sell for price of the day for quality, quantity & location.
2.Forward contracts provide growers flexibility for up to two years.
3.Futures allow growers, traders or buyers to shift the time of pricing grain, limiting risk to the basis risk.
4.Options allow buyers and sellers of grain the opportunity to hedge against unfavourable price movements
(Put floor price, Call ceiling price).
5.Commodity swaps allow growers to use risk management tools based on futures markets but without the hassle of dealing directly in the futures market.
6.Basis contracts allow growers (the seller) to secure a price for a specified tonnage of grain by locking in all three price components separately (futures, foreign exchange and basis) and possibly at different times.
7.Pools offer sellers simplicity and flexibility – average pool price.

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10
Q

What are the Grain Marketing options for the grower?

A

Sell Physical (Post Harvest)
• Sell to delivered Buyers
• Sell grain delivered site (Bulk Warehousing)
• Sell grain ex-farm
• Grain Pools or other managed marketing products
Sell Physical (Pre-Harvest)
• Sell forward to delivered Buyers
• Sell forward delivered site (Bulk Warehousing)
• Sell forward grain ex-farm
Non-Physical
• Swaps
• Futures
• Options
• Exotics (a mixture of the above including CFD’s)

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11
Q

What is the Spot Market?

A

Spot market often termed as the Cash market is the
simplest method of selling.
The price received is the price in the market on that day for grain for prompt delivery. In the spot market the five contractual elements of quantity, quality, time, place and price are agreed on the spot.

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12
Q

What is a Forward Contract?

A

Forward or cash contracts allows growers to forward contract grain for delivery in the future, with a price being fixed at the time of contracting.
Their simplicity makes them the most commonly used hedging tool in Australia. The major forward contracts used in Australia are
1. fixed-grade contracts
2. multi-varietal contracts (rare) and 3. multi-grade contracts

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13
Q

What are Grain Pools?

A

Grain Pools are the grain industry equivalent of a managed fund. It is basically outsourcing the marketing of the grain to a third party in the belief (or hope) they can extract a price premium for the grower.
There are 2 basic Types of Grain pools 1. Actively Managed Pools
2. Index Selling Pools

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14
Q

What constitutes a good price?

A

“A good price is one that guarantees an acceptable return on investment (ROI)”

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15
Q

What factors affect Return on Investment?

A 
Production Level
COP (Cost of Production) Value of land
Level of debt (gearing)
Level of Inputs (fertilizer etc)
Price of inputs
Location (cost of freight)
Production efficiency
Amount of labour (expense) required Synergies with overall operation (integration)
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16
Q

How many components are there in the Grain Price Component?

A

There are three components to all grain prices & each component has an independent impact on price.

  1. Futures
  2. Basis
  3. Exchange rate
17
Q

How much do Futures make up of the grain price?

A

Futures make up about 70% of the price, the balance is made up of foreign exchange and basis.

18
Q

What is the Futures Market?

A

Futures are anticipatory markets. Futures markets allow growers,traders or buyers
to close down price risk to the difference between the underlying futures and the price of physical commodity – the basis.

19
Q

What is the Grain Price Component?

A

The price difference (cash price – futures price) is known as the basis.
• A primary consideration in evaluating the basis is its potential
to strengthen or weaken.
• The more positive (or less negative) the basis becomes, the stronger it is.
• In contrast, the more negative (or less positive) the basis becomes,the weaker it is.

20
Q

What is the price basis?

A

Price basis is the strength of our domestic market.

21
Q

What are some examples of factors that impact domestic basis?

A

The BOM announces the appearance of an El-Nino weather pattern
Australia receives above average rainfall across the wheat belt in spring
Australia receives above average rainfall in November and December
There is a large carry-over in domestic stocks in Australia
Australian exporters implement a record export program
Northern NSW and Southern QLD has a poor sorghum harvest
Wheat prices in Australia reach import parity

22
Q

What affects the Grain Price Component?

A

Exchange rates significantly impact on final grain prices. Most Australian grain is sold in US dollars and then converted into Australian dollars.

23
Q

What are two kinds of Future Market participants?

A

• Speculators are traders who attempt to anticipate &
profit from futures market movements.
• Hedgers are those that are using futures products to protect their price exposure
A growers position becomes speculative if he /she sold futures contracts and did not expect to harvest any grain.

24
Q

What is a Futures Contract?

A

Futures contract is a legally binding commitment to make or take delivery of a specific quantity and quality of a given commodity at a specific delivery location and
time in future.

25
Q

What do Options do?

A

Options provide both buyers and sellers of commodities the opportunity to hedge against unfavourable price movements while still being able to benefit from price movements.

26
Q

What are the two types of Options?

A

Put options give the buyer the right but not the obligation to sell a futures contract at an agreed price on or before a set date.
Call options give the buyer the right but not the obligation to buy a futures contract at an agreed price on or before a set date.

27
Q

What are Commodity Swaps?

A

Commodity swaps have been developed by local financial institutions and intermediaries to provide growers with a mechanism to use risk management tools based on futures markets but without the hassle of dealing directly in these markets.

28
Q

What is the relationship between Cash & Futures Prices?

A

As the delivery date approaches, the Basis normally narrows i.e. Spot price approaches the future price as
1) carrying charges fall
2) uncertainty about future falls.
On the delivery date the two prices converge

29
Q

What can happen ?

A
  1. The Australian wheat belt has a bumper season and records a massive crop. Farmers are selling at $200 delivered silo.
  2. The season turns dry and any moisture available at cropping time is quickly depleted with a dry winter and spring
  3. There is a wet harvest and most of the crop harvested in the region is feed grade, due to the downgrading of the crop due to moisture damage
  4. Russia implements an export ban due to the scarcity of grain available for internal consumption
  5. The Australian dollar rises to it’s highest point in 5 year and is trading at US $0.99
  6. Australian basis remain stubbornly strong in the face of little bulk exports causing a glut of grain domestically

AGB310 (12 decks)

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