FX in grain marketing

[jdepape]

Principles 1 through 4 relate to <b>TRADING</b> wheat - buying and selling.

[boarderbloke]

The FX risk is in the futures price! As the USD has increased in value vs. other currencies around the globe, Futures prices of grains based in U.S. exchanges have dropped! Look at wheat, corn and beans!
Countries around the world have said to the USA exchanges, "No, we are not giving you more of our currency(what ever it might be) for a bushel of wheat or corn or beans! We're going to give you the same amount of "our currency" for the same bushel." When that happens, a bushel is sold for fewer USD's, the result being a drop in futures price at the exchanges.
Without any "event" to substantially change the intrinsic value of these grain commodities, US futures prices will drop, they have to, in order to stay competitive in a global market place, that's the open market at work.
The way I see it, the exchange risk IS IN the futures price, not the basis.

[jdepape]

boarderbloke:

you're absolutely right - when the USD strengthens against other currencies - as it is now - it pressures US futures markets.

But because we are trading in Canada in CAD, the result of that is simply flat price risk - US futures are pushed lower.

There is price risk, but when you're hedging your Canadian wheat program, it's not an FX (CAD/USD) risk that you need to hedge - it's flat price risk.

If you were a wheat trader (not a farmer), how would you hedge that?

[fjlip]

CAD relative to USD is at $0.80, but what is CAD relative to our other markets? Has that changed? As Boarder says the buyers will NOT pay more so futures drop to find buyers. I'd guess grain sold to USA might increase in value but maybe not else where.

[bucket]

Canada's dollar should have had us cleaned out pretty quick in wheat.

Sadly our transportation system won't allow it to happen.

[Kodiak]

Boarder and John. Aren't you both right? As a seller, a change in fx (relative to $US) changes the price I receive in CAD, if I'm unhedged. And as a Canadian wheat trader, the principles John outlined leave him covered and hedged.

[jdepape]

fjlip:

We tend to look at the USD in CAD terms. But what if the USD is strong against the Yen too? (which it is)

We can say our prices (in CAD) should be higher, but to the Japanese, the prices (in Yen) are also looking higher, which rations demand - and pressures prices in Japan, meaning our prices will also be pressured.

The flip side of that is that we compete with the US so as their prices move higher to Japan, we have room as well.

[boarderbloke]

John, if you were "long" wheat, you'd have to hedge against the USD. If the USD rises wheat futures are gonna drop,(all other market factors holding the same)
That's why currency risk in tied to futures, not basis.

John, imagine for a moment that Canada had grain exchanges for wheats, corn and beans, just as the USA has. Imagine they have the same size of volume and activity as those in the USA currently have. And imagine that Canadian farmers and Canadian graincos used them, just like Americans use those exchanges in the USA.
Now imagine the CND is at $0.80 USD. That would mean that the wheat, corn and beans on those Canadian futures exchange, would be 25% higher than on the USA exchanges. There would be no reason for any difference in basis with a par CND or an $0.80 CND. Even if wheat dropped on the US exchanges, the currency difference(25%) would still show up in the Canadian exchanges, and would be considered a price premium for Canadian farmers. That premium would allow Canadian farmers in return, to buy, say US made fertilizer or equipment and have similar purchasing power that the US farmer would. Essentially, we'd be paid the same for a bushel of wheat on the futures. The "basis" that would and should represent, graincos handling costs, shipping costs, and graincos profit, would all be different based on the location you delivered the grain. Currency exchange would be no part of basis.

[wilagro]

Seems to me we used to just grow grain and let the CWB do the math.
Now every farmer has to be a friggin' trader, banker, speculator, financial wizard, trucker, hedger, bookkeeper, politician, lawyer, policeman, communicator and sometimes even a husband/wife and neighbour.

[charliep]

I will leave this discussion alone other than to support John's ideas. The processes around managing risk between farm purchases, sales to end use customers and logistics is a very complicated process. The process at the end of the day is very mechanical/based on procedures. Was going to go into a long explanation but would bore everyone to pieces. I can still remember the guy at UGG 20 years who walked around every with the companies exact risk position on the cash side - inventory, contracts, sales, futures. The objective was to make margin. A lot of making margin was managing risk with the caveat risk is both protecting against pain but also giving up gain.

Can't explain why grain companies post basis the way they do. Can't tell you whether they are making excess profits except they are likely doing well. Don't know what more regulation would do other than adding another layer of complexity/inefficiency into the supply chain. The answers I think lie in the supply itself in terms of better communication/coordination.

[fjlip]

Certainly next to ZERO time for neighbors in this area, Wilagro.
I vote boarder for Finance or Ag minister to fix this shit show! Like your math.

[stonepicker]

And that's why some people loved the cwb., because they don't wanna learn about marketing and they don't wanna see their neighbor get more than them for a bushel of wht.,every other industry in the world has had to get up to speed to be competitive in the 21st century, why not farmers too. But some continually want to stick their head in the sand and hope for the best. ( and complain about it )

[ProFarmer]

There she blows! Market is looking for wheat to cover positions. As in all commodities.Last kick at profitable marketing be the US goes broke??????

[jdepape]

boarderbroke:

If you were "long" wheat <b>as a speculator</b>, you <b>COULD</b> hedge against the USD - if you wanted to be long wheat net of any currency effect. But <b>as a hedger/trader</b> you wouldn't.

Say your short Mpls futures as a hedge against cash grain you've bought in CAD. If the futures drop because of a strong USD, the market you are selling into will also drop accordingly - all else being equal. You're fine with that - you offer to sell the cash grain you own at the lower cash prices and you lift your hedge - which worked to protect you from the drop in price.

But let's say you hedge the USD impact on the futures as you suggest.

Since you are short futures, you are at risk that the USD will weaken and provide support to futures, possibly pushing them higher. This is the risk you want to protect against - so you sell USD (USD index? USD/CAD pair? Not sure what you would sell.)

Now let's say the USD surges higher - you lose in your FX account, and your wheat futures are kept lower (but only maybe - there are many other factors pushing wheat prices).

Now you go to sell your cash wheat in USD and the price is - all else being equal or unchanged - a bit lower, in line with the lower futures.

You sell your cash, lift your futures hedge and lift your USD FX hedge. Everything worked as it should - except you have a loss in your USD FX account and you have nothing else to compensate it with.


Re your "imaginary" market with Canadian (CAD) futures. I agree that - all else being equal (or unchanged) - the CAD futures and the USD futures for the identical commodity should reflect the current FX rate. Just like IBM stocks in NY and TO differ only by the FX rate.

But the underlying commodities would have to be identical, which is not likely.

And after all that, it is just theoretical, isn't it? We don't have those CAD futures to absorb the FX, and since the US futures don't (for a hedger/trader), it has to be in the basis.

[katoe]

Interesting every time the grain companies get beat up for too long its John Depape to the rescue for them . Funny they never defend themselves.