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TRADE NEWS
Price risk management alternatives for the 2017 / 18 18 marketing season
PRICE RISK MANAGEMENT IS ONE OF THE MORE DIFFICULT DECISIONS WHICH PRODUCERS ARE CONFRONTED WITH EVE RY SEASON . HOWEVER , A PRO- DUCER HAS TO BE SATIS- FIED WITH THE REALITY THAT HEDGING DECISIONS FOR ANY CROP PLANTED AND TO BE HARVESTED ARE TAKEN ON THE BASIS OF INFORMATION AVAIL- ABLE AT THE TIME .
Table : Hedging strategies
FRANS DREYER
Hedging on the JSE Agricultural Commodities Market ( SAFEX ) remains the only means of managing the different alternatives and to mitigate counter-party risk . It is also important for producers to understand the implications of implementing a hedging strategy in order to avoid any future misunderstandings .
Against this background and with the information at our disposal four hedging alternatives are reflected in Table 4 . The strategies are proposed , based on the fact that domestic stock is currently more than sufficient and that exports and consumption at the current rate will not decrease the surplus . Weather predictions for the coming season look favourable and intentions to plant indicated that stock levels will probably remain at high levels . USA prices are mostly trading in a sideways band , but the rand has the potential to increase export parity levels significantly .
The detailed article with more background information regarding the fundamental factors and potential price drivers for the coming season , can be read at http :// senwes . co / frans .
For more information , please contact your nearest grain marketing advisor ( procurer ). Alternatively Frans Dreyer - Grain Brokerage ( 018 464 7786 ), Hansie Swanepoel - Market Information ( 018 464 7575 ) or Hennie du Plooy – Producer Marketing ( 083 388 4968 ).
Strategy Advantage Disadvantages Important to bear in mind
Minimum prices / ( Put option ) Low risk
Protects against price decreases .
Option costs high - close to export parity .
Market prices move to more than the option premium every season . Should the price increase and should there be more certainty about the harvest , this option could be resold and a portion of the option premium can be recovered .
Synthetic minimum price ( fixed price contract and buy call option ) Medium risk
Protects against price decreases . Potentially lower option cost than minimum price .
Price increases between the fixed price level and the out the money call option level cannot be utilised .
Should the market price move to above the call option level , it would be sensible to reconsider the strategy in respect of profit taking by reselling the call option . This option premium profit can then be added to the fixed price level .
Fixed price ( high risk ) |
Protects against decreasing prices . No option cost . |
Cannot share in upward price potential . |
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A fixed price strategy poses definite delivery or expensive buying-out risks . The market usually increases in an aggressive manner when a fundamental movement takes place , such as a mid-summer drought in a critical phase of the growing season . The required production levels may not materialise in order to deliver against the lower fixed price . |
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Senwes Collective Price contract ( CPC ) ( Low risk )
Protects against decreasing price movements . Tonnes of producers forming part of the product , are hedged by means of one or more fixed hedging strategies through the course of the production season .
DEC 2017-MAR 2018 • SENWES Scenario
Option costs can be high should the market move in a lower or sideways direction throughout the season .
Utilise upward price potential actively and objectively by means of fixed strategy principles .