Logical form of price discovery for West Australian growers
Tuesday 15 September 2009: The new ASX WA Wheat futures and options contract (WAW) will allow all participants in the export of Australian milling wheat a logical form of price discovery, which has been missing since deregulation of bulk wheat exports in July 2008, according to Andrew Lennon, Head of Commodity Sales, Commonwealth Bank.
“The new WA ASX wheat contract will become the benchmark for WA wheat prices and a method of price discovery for WA growers, exporters and consumers,” he said.
“Furthermore, the associated risk management tools which now can be applied to the WAW futures contract should provide various benefits to all industry participants.”
From a grower’s perspective, the new WAW will give them a chance to take advantage of attractive basis opportunities during the season while reducing their exposure to production risk.
Mr Lennon commented that “growers who traditionally lock in basis and production risk during the season, now have the ability to protect their position more effectively, regardless of adverse growing conditions”.
“Given local wheat prices have experienced significant falls this season, growers who plan to store their wheat in anticipation of basis appreciation post harvest can also protect their ‘long’ position through swaps or options should wheat prices remain bearish throughout next year.”
From a buyers or traders perceptive, WAW futures contracts should also increase the effectiveness of managing their physical positions, particularly in times of reduced supply or drought.
“As the WAW futures contract can be physically delivered throughout the Kwinana port zone, any convergence problems between cash market and futures market should be avoided, which was a problem for some commodity exchanges during the prices spikes of 2007,” Mr Lennon said.
Mr Lennon also commented “as a result of the WAW our customers are now able to use swaps or options in order to ‘lock in a local price’ that suits their own marketing plan.”
“At present, we are one of the only financial institutions offering both swaps and options on all five ASX grain futures contracts at the farm gate level,” he said.
“We think that this is a fantastic development for the local industry, providing opportunities for producers, consumers, traders, speculators,” Mr Lennon said.
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