Written by: Nic Sewell | Grain Marketing Advisor | 0436 606 525
Written on: 29th May 2023
What a ride this past 12 months has been! As I write this newsletter, it is interesting to recall what was happening on this day 12 months ago. The horrendous Ukrainian invasion shocked the world and the CBOT wheat futures price hit $A665 after India announced they would ban exports. To be honest, it wasn’t a good couple of days to be a grain marketing advisor!
12 months later, we wake to the news that the Black Sea Grain Corridor deal will be extended for a further 60 days. Up until this point, Russia was doing their best to convince everyone that the Grain Corridor wouldn’t be extended without the easing of some significant sanctions from the West. The removal of the Russian restrictions didn’t eventuate, yet Russia still signed on the dotted line for another 60 days. Great news for the Ukrainians who need all the good fortune they can get but it paints a bearish picture for global grain prices. Surprisingly, we are now at the lowest CBOT Wheat futures level since October 2021. Co-incidentally, October 2021 was an interesting time for the Planfarm Grain Marketing team as this was when we switched our focus from cash products to look closely at CBH Pool products across all commodities.
So, what brought this about? The 2021 season outlook was positively setup with big and timely rainfall events for most of the wheatbelt from Cyclone Seroja. Despite a significant frost event, the season was on track to be our biggest on record. At the same time, CBH were experiencing significant supply chain challenges mostly on account of COVID logistical issues. In short, Operations couldn’t feed the grain through to ports fast enough which looked to worsen with an enormous crop about to flow in. Consequently, we saw significant bottlenecks in the supply chain which in turn allowed traders to decrease cash prices to growers, creating
huge profit margins for the grain traders and very poor WA cash basis levels.
BASIS REMINDER: It is the difference between our local prices (e.g. cash APW1) and international prices (e.g. CBOT). A positive basis means our local prices are higher than international prices and a negative basis means our local cash prices are lower than international prices.
The options were limited, we could continue to sell for cash as per normal or find a way to effectively become the trader and share the risk (and reward) that comes with it. A few companies across the country offer Pool products, however there was only one that had access to shipping capacity and were willing to share it (and the trading margins) with grower participants. CBH Grain!
This was a game changer. Not only was a buyer willing to share the rewards (and risk) of exporting grain at a fixed management fee (~$8/t), but they also were required to share the shipping stem. This would have otherwise gone to the CBH cash trading team as per normal who would have made the huge elevator (exporter) margins. As seen via Chart 1 below, the international value (dark maroon line) and local (green line) prices largely follow one another, but in the 2nd half of 2021 they widened significantly. This gap is a good indication of the trader’s profit margin. As long as traders had shipping stem (port slots), they were destined
to make good margins. This was not just the case in WA but was the same across Australia (see Graincorp share price in the last 2 years!!).
Chart 1 – World Grain prices versus KWI port zone
For the majority of the 2021 harvest, our key objective was to share this message amongst our Planfarm Marketing grower group, especially for those holding swaps as our strategy was to unwind 2022 swaps in line with Flexi-Starter Pool sales. It was a hard sell, as for the last decade our strategy has largely advised against Pool products as cash products have consistently outperformed Pools (excluding lupins and oats). As seen the next page in Charts 2 and 3 except for 2021 CBH Pools (light blue bar), Pool returns have been consistently below the green bars (Planfarm Clients by Port Zone).
Chart 2 & 3 – Results from the Planfarm Marketing client benchmarking for APW1 (top) and ASW1 (bottom) from 2013 – 2021
CBH Pool performance over the past two years have been exceptional, outperforming most marketing strategies (as demonstrated above for the 2021 season). Their Pool returns achieved clearly demonstrates the trading margins achieved in the cash market. CBH Pools are mandated to maximise returns for Pools participants and so at a time when cash trader margins were frustratingly high, CBH Pools gave sound reason to dive in.
As is demonstrated in Chart 4 below the large gap between our local price and the international price (trader margin) continued right through 2022 where we saw an even bigger WA crop produced. Roll the tape forward to today and trading margins have narrowed substantially. International commodity prices have eased, grain is flowing out of the Black Sea and the WA season is looking average at best.
Chart 4 – World wheat prices (International Grains Council versus Kwinana port zone (APW1) (FOB $US/tn) from 2016 to 2023. Actual difference Kwinana port zone (APW1) grey line.
On top of this CBH Operations have exceeded expectations in moving grain out of the ports, achieving record monthly WA exports of around 2MMT per month. Bottlenecks seen in 2021 and 2022 seasons have eased while WA cash buyer competition has increased. Trading margins have reduced and consequently we have seen a significant improvement to our WA cash basis level as can be seen in Chart 5 below.
Chart 5 – WA basis (CBOT SRW versus APW1 FIS Kwinana port zone).
With the changes in the grain marketing environment both locally and internationally, we need to revisit our grain marketing strategy, especially for those holding swaps. Given cash basis is now positive across all port zones for wheat we anticipate a lot higher percentage of 2023 grain will be sold for cash. While we still expect Pool products will continue to be an important part of our grain marketing strategy, at this stage, we will not be heavily advocating CBH Pool products, mostly on account of WA’s reduced production outlook with limited CBH supply chain issues.
Local market conditions are changing as will your grain marketing strategy. At this stage, we don’t expect Pools to outperform Cash as they have in the past 2 years without similar bottleneck logistic issues, but perhaps reflect an average of the cash price over the life of the pool.
June is a vital time with difficult and calculated decisions assessed across the board. 2023/24 season Flexi-Starter Pool opens June 12th and closes on Friday, June 23rd.
Please contact your grain marketing team prior to this date to review your strategy, as with any season, a lot can change between now and then.