Consider unknowns in grain price risk strategy

Consider unknowns in grain price risk strategy


Agribusiness
SPECULATION RIFE: Some have speculated the "barley dumping" saga was a fallout from the recent APEC conference, where Australia's unilateral ties with the United States angered China. Photo: MICK TSIKAS

SPECULATION RIFE: Some have speculated the "barley dumping" saga was a fallout from the recent APEC conference, where Australia's unilateral ties with the United States angered China. Photo: MICK TSIKAS

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THE recent, sudden drop in barley returns is a timely reminder as to how geopolitics can have a major impact on price from a grower perspective.

Aa

THE recent, sudden drop in barley returns is a timely reminder as to how geopolitics can have a major impact on price from a grower perspective.

China has an insatiable appetite for barley and stocks. This had many scratching their heads as to why they would launch an anti-dumping investigation into Australian barley. 

Many have speculated it actually had nothing to do with barley at all.

Some pointed to a fallout from the recent Asia-Pacific Economic Cooperation conference that saw unilateral ties with the United States angering China – the biggest buyer of Australian barley.

Geopolitics is arguably the biggest mover of price because nobody can generally see these issues coming.

Could it be that our military ties with the US hindering China in the South China Sea have seen barley growers inadvertently pulled into Chinese foreign policy? 

The fact is that trade relations, government stance and military ties, among other things, can cause significant shifts in price across all commodities.

Related reading: China delivers barley bombshell

Geopolitics is arguably the biggest mover of price because nobody can generally see these issues coming.

For this reason, we can experience large market movements or complete withdrawals of price as the market establishes what and where it stands. These shifts can occur extremely quickly as news is released.

In the case of the barley drop, a number of buyers were very keen on malt yet within 15 minutes they couldn’t get out of it quickly enough once the news became apparent.     

These types of events happen in the Australian grain industry regularly.

Pulses were adversely affected by increased Indian tariffs last year, which quickly impacted upon exporters.

Sweeping tariffs of 50 per cent on peas, initially meant that any cargo on the water at the time was devalued by that amount. The effect on growers was a large drop in prices, with some traders not posting a price at all. 

Related reading:Barley price recovers after China controversy

Bean prices were affected by another geopolitical incident a few years ago.

Floating the Egyptian Pound amid a poor economic outlook caused havoc on beans, with prices suppressed for a couple of years.

Just as growers have to monitor credit risk, buyers have the same task and at the time, no one particularly wanted to give Egyptian buyers credit. 

The trade war between the US and China, which has arguably spilled much further afield, is a great example of a selection of a tit for tat exchange of commodities and retaliation.

The US first placed penalties on Chinese imports of solar panels, which then extended to metals.

China responded by launching an investigation into US sorghum and then extended tariffs to the likes of pork and soybeans. Soybean growers saw a quick decline in price from nearly 1100 cents a bushel to 820c/bu in less than a month.

If you’re a grower in the Midwest you may argue that the trade war is not protecting US interests, however they are embroiled in larger foreign policy. 

Of course, not all geopolitical issues are negative for price. War adds uncertainty to markets and where there is uncertainty, there is volatility.

Free trade agreements are also part of the story, where politics comes into play and prices benefit.     

As these issues are so difficult to predict (if not impossible) and the timing is completely unknown, it is important as a grower to factor in the unknown as part of your price risk management strategy.

Finding peaks and troughs is hard, but a balanced approach to price risk management is important to help ride out the lumps and bumps of a season. It also provides a buffer to outside influences of which you have limited control.    

Aa

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