Monday, February 22, 2010

Analysis doesn’t support conclusions

We read with note an article recently in the Rural Press entitled “Argument over the Single Desk”. If we are correct, the article draws the conclusion that, to date at least, “growers are not getting the same value for their wheat as they did under the single desk system”.

The analysis took the historical AWB net pool returns for Port Adelaide and then compared this to the $A value of Chicago Board of Trade (CBOT) wheat futures in late November each year. From 1994 to 2008 (dropping out the drought years of 2002 and 2006) the analysis contented that the difference between the net AWB pool returns and the $A value of CBOT wheat futures late in November each year was A$9.50/t in favour of the pool. For 2008 it suggested instead of a premium – on average of $9.50/t – a deficit of A$23.50/t resulted and for 2009 (to date at least) a deficit of A$22.50/t is showing. Using this “crude measure” the conclusion drawn is that in a deregulated market Australian wheat is averaging close to $32/t under the AWB single desk system.

It is simply erroneous to draw any conclusion about deregulation from this analysis. The fact is that physical wheat values in the past few years have not kept their usual relationships (historical basis relationships) with CBOT wheat futures.

A comparison of a range of international wheat cash prices and CBOT wheat futures shows that in recent years there has been a very noticeable divergence in the price of all international wheats vs CBOT.

This is nothing new to market watchers. The US Commodity Futures Trading Commission (CFTC) has held a number of recent enquiries into the lack of convergence between cash wheat prices and CBOT wheat futures. The operators of CBOT have gone to some lengths to change the futures contract specifications (such as variable storage charges and increased delivery locations/methods) in order to aid convergence.

The increase in investment flows, via index funds and other long only funds, are the major reasons for this divergence. At today’s prices, the investment in CBOT wheat futures by long-only type funds is a little over US$6 billion dollars or 33mmt. It is largely the presence of this capital washing around in the futures market that has caused the divergence between global cash wheat values and CBOT wheat futures.

Rather than making reckless claims about the impact of deregulation, we offer an alternative explanation that the divergence between cash wheat prices and CBOT wheat futures is a global phenomenon. The fact that Australian wheat prices have diverged from CBOT has little to do with deregulation of the Australian export wheat market. It has much more to do with the change in shape of the relationship between CBOT wheat futures and global cash wheat values.

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