Wheat Procurement Analysis
Conducted by Advance Trading, Inc
In Coordination with
Sultan Qaboos University
Muscat, Oman
March 21, 2016
Introduction to ATI
Advance Trading, Inc. is a forward thinking, non-proprietary
commodity futures/options/derivatives brokerage firm
providing risk management analysis, development of and
planning/execution of hedging strategies.
- Established in 1980 by grain trade veterans.
- Headquarters in the Central U.S. with 37 branch offices
- 20 Commercial Consultants in main office, over 40 remote.
- In house Research Department, Analysts/Economists
- Domestic and Global client base.
- Average volume of four to five billion bushels in grain
contracts traded annually.
Oman Wheat Purchase Study
Volatility in commodity markets shape the landscape in
Global Agriculture
Agriculture – unique industry full of challenges:
- Involves the annual growth cycle of a living organism
- Greatly affected by weather
- Greatly affected by global economies and geopolitical
challenges
- Greatly affected by price volatility, supply/demand shifts as
a result of price changes
- Provides sustainability/nourishment to the global
population
Oman Wheat Purchase Study
Chicago Wheat Price Volatility
*Calendar Year To Date
Wheat Volatility
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
High
2016*
2015
2014
2013
2012
2011
2010
2009
2008
$0.00
2007
Change
$0.53
$1.65
$2.69
$2.01
$3.58
$3.20
$3.78
$2.47
$8.45
$5.97
$2.36
$0.82
$1.42
$1.36
$1.79
2006
Low
$4.35
$4.51
$4.66
$5.99
$5.90
$5.72
$4.26
$4.29
$4.55
$4.12
$3.21
$2.87
$2.83
$2.73
$2.56
2005
High
$4.89
$6.16
$7.35
$8.00
$9.47
$8.92
$8.04
$6.76
$13.00
$10.09
$5.57
$3.69
$4.24
$4.09
$4.34
2004
Year
2016*
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2003
WHEAT
Low
Fourteen Year Average
Volatility for Wheat =
2011 - 2015 Average
Volatility for Wheat =
$2.97
$2.62
Oman Wheat Purchase Study
Kansas City Wheat Price Volatility
HRW WHEAT
*Calendar Year To Date
High
2016*
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
2005
Change
$0.53
$2.02
$3.05
$2.19
$3.34
$3.59
$4.08
$2.74
$8.95
$5.96
$1.87
$0.83
$1.19
$1.26
$2.24
2004
Low
$4.38
$4.40
$5.50
$6.33
$6.14
$6.32
$4.55
$4.54
$4.90
$4.33
$3.68
$3.10
$3.12
$2.95
$2.71
2003
High
$4.91
$6.42
$8.55
$8.52
$9.48
$9.91
$8.64
$7.27
$13.85
$10.29
$5.55
$3.93
$4.31
$4.21
$4.95
2002
Year
2016*
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
HRW Wheat Volatility
Low
Fourteen Year Average
Volatility for HRW =
2011 - 2015 Average
Volatility for HRW =
$3.09
$2.84
Oman Wheat Purchase Study
What is a Hedge, When and Why
• Hedging is a transfer of risk without purchasing insurance
policies.
• Employs various techniques and tools.
• Involves taking an equal / opposite position in two different
markets (cash versus futures/options).
• NOT trading positions based on an individuals opinion or
predictions – NOT speculation.
• PRICE IS UNPREDICTABLE
Oman Wheat Purchase Study
What is a Hedge, When and Why
• For the consumer/end user, hedging manages price
fluctuations prior to and/or after a commodity has been
priced.
• Managing/locking in output margin.
• Hedgers use futures/options/derivatives to protect them
from price volatility that could negatively impact
profitability or sustainability.
Commodity Price Risk Management
Futures vs Options
Futures Hedge
Establishes purchase price level
Options Hedge
Establishes Maximum Purchase Price
Oman Wheat Purchase Study
Oman's Annual Wheat Imports
1,200
1,109
1,063
Metric Tonnes (000)
1,000
800
677
600
422
388
400
321
269
200
0
2009
2010
2011
2012
2013
2014
2015
Oman Wheat Purchase Study
250,000
Metric Tonnes
200,000
150,000
100,000
50,000
0
Oman Wheat Purchases by Arrival Date
Oman Wheat Purchase Study
Oman Imported Wheat Price Ranges
$600
$300
$496
$474
$296
$400
Price, $/MT
$250
$395
$389
$383
$379
$350
$300
$194
$280
$275
$200
$307
$285
$286
$283
$249
$225
$200
$227
$205
$200
$134
$124
$110
$103
$96
$150
$100
$103
$100
$50
$50
$0
$0
2008
2009
2010
2011
2012
Low
2013
High
2014
Range
2015
Ave
Range, $/MT
$500
$350
Oman Wheat Purchase Study
Oman Wheat Imports: 2008-2015
6%
15%
6%
12%
61%
Arg
Aus
Canada
Russian
Other
Oman Wheat Purchase Study
Process of creating study and analyzing data
- Assess correlation of cash wheat prices of:
- Australian
- French
- Russian
- Versus CME Chicago SRW and Kansas City HRW futures.
- Exchange with strongest correlation then used for the
study showing results of various hedging practices.
U.S. HRW & Eastern Australia AH FOB Wheat Prices
400
350
$/MT
300
250
200
150
HRW
E Aus AH
U.S. HRW & Western Australia APW FOB Wheat Prices
400
350
$/MT
300
250
200
150
HRW
W Aus APW
U.S. HRW and French FOB Wheat Prices
400
350
$/MT
300
250
200
150
HRW
French Wheat
U.S. HRW & Russian FOB Wheat Prices
400
350
$/MT
300
250
200
150
HRW
Russia, FOB 11.5%
Oman Wheat Purchase Study
Correlation Coefficients:
2/3/14-3/7/16 E Aus AH
SRW
0.7935
HRW
0.9271
S Aus APW
0.6455
0.8281
W Aus APW French, 10.5%Russian, 12.5%
0.7271
0.8920
0.9089
0.8831
0.9228
0.9084
The above analysis suggests that Kansas City HRW FOB
values correlates “best”with prices from other origins with
the exception of S Australian APW. As a result the HRW
contract was chosen as the appropriate hedging medium.
Oman Wheat Purchase Study
Our team determined a needed part of this study was to run
simulations using data provided:
Simulation Using Monarchy of Oman Purchase Dates:
- Procurement plan utilizing price risk management six
months prior to cargo purchase – buying futures or call
options.
- Simulation covered time set of sixteen events provided
that could most accurately be analyzed.
100
Hedge Six Months Before Purchase
With Futures or Call Options
Actual Purchase Times
50
Cents / Bushel
0
-50
-100
-150
-200
Futures
-250
ATM Option
Oman Wheat Purchase Study
Simulation Using Monarchy of Oman Purchase Dates:
Simulation Results:
-
August 13, 2013 through October 9, 2014
Futures, $2.1375/bu loss to $0.81/bu gain
Options, $0.60/bu loss to $0.4013/bu gain
Futures loss over period of $0.0513/bu
Options loss over period of $0.0533/bu
Oman Wheat Purchase Study
Our team also ran two simulations to assess the viability of a
more regimental hedge plan:
Simulation 1:
- Procurement plan utilizing price risk management six
months prior to cargo purchase, followed by downside
price risk management at the time of pricing through the
time the cargo was utilized.
- Strategy followed over five year period.
Oman Wheat Purchase Study
Simulation 1 example – for Cargo purchased June 3, 2010:
- Calls purchased on December 3, 2009 (*Sept calls*)
- Calls liquidated on June 3, 2010
- September Puts purchased on June 3, 2010
- One month in transit /placing of wheat to location
- Began liquidating Puts as wheat is utilized evenly over
month of July.
- Liquidated Puts each Thursday (July 1,8,15,22, and 29)
8-Jan-15
4-Sep-14
Futures
1-May-14
2-Jan-14
5-Sep-13
2-May-13
3-Jan-13
6-Sep-12
3-May-12
5-Jan-12
1-Sep-11
5-May-11
6-Jan-11
2-Sep-10
6-May-10
Cents / Bushel
300
Hedge Six Months Before Purchase
With Futures or Call Options
200
100
0
-100
-200
ATM Option
-300
Hedge Six Months Before Purchase
With Futures or Call Options
150
Cents / Bushel
100
50
0
-50
-100
Futures
ATM Option
-150
2010/11
2011/12
2012/13
2013/14
2014/15
Average
Oman Wheat Purchase Study
Simulation 1 :
Simulation Results:
-
June 2009 through Dec, 2015
Futures range from $1.16/bu loss to $1.45/bu gain
Options range from $0.25/bu loss to $1.01/bu gain
Futures loss over period of $0.17/bu
Options loss over period of $0.05/bu
Oman Wheat Purchase Study
Simulation 1A:
- Procurement plan utilizing price risk management six
months prior to cargo purchase, followed by downside
price risk management at the time of pricing through the
time the cargo was utilized.
- Plan followed over five year period.
Oman Wheat Purchase Study
Simulation 1 A Example – for July usage:
- Calls purchased on December, 2009 (*Sept calls*)
- Calls liquidated in June, cargo price fixed
- September Puts purchased in June 2010
- One month in transit /placing of wheat to location
- Began liquidating Puts to simulate utilization of wheat
evenly over month of July.
- Liquidated Puts each Thursday (July 1,8,15,22, and 29)
Oman Wheat Purchase Study
Simulation 1 A Results
4/2/15
1/8/15
10/16/14
7/24/14
5/1/14
Futures
2/6/14
11/14/13
8/22/13
5/30/13
3/7/13
-300
12/13/12
9/20/12
6/28/12
4/5/12
1/12/12
10/20/11
7/28/11
5/5/11
2/10/11
11/18/10
8/26/10
6/3/10
Cents / Bushel
300
Hedge One Month Before First Usage
With Futures or Put Options
200
100
0
-100
-200
ATM Options
Hedge One Month Before First Usage
With Futures or Put Options
50
40
30
Cents / Bushel
20
10
0
-10
-20
-30
Futures
ATM Option
-40
2010/11
2011/12
2012/13
2013/14
2014/15
Average
Oman Wheat Purchase Study
Simulation 1A :
Simulation Results:
-
June 2009 through Dec, 2015
Futures range from $0.28/bu loss to $0.39/bu gain
Options range from $0.15/bu loss to $1.21/bu gain
Futures gain over period of $0.08/bu
Options gain over period of $0.04/bu
Oman Wheat Purchase Study
Simulation 2:
- Entire annual import needs were purchased (nearby
futures) on December 1 of the previous year, futures were
then liquidated(nearby) at an even rate from the end of
May through the middle of the following May.
Simulation 2A:
- Monthly amount of import needs were purchased (nearby
futures) six months ahead of cash purchase, then
liquidated(nearby) six months later.
Oman Wheat Purchase Study
Simulation 2 Example – purchase of annual usage upfront:
- Dec 5, 2013 - buy July HRW wheat futures at the
market, amount equating to full year usage.
- June 27, 2014 – begin selling nearby HRW wheat
futures evenly over a twelve month period of time.
Buy All Dec 1 (HRW)
300
225
200
152
Cents /bu
100
12
0
-46
-100
-85
-107
-142
-179
-200
-245
-300
07
08
09
10
11
12
13
14
Ave
Oman Wheat Purchase Study
Simulation 2 :
Simulation Results:
- December 2007 through Dec, 2014
- Futures range from $2.45/bu loss to $2.25/bu profit
- Average loss for period of $0.46/bu
Oman Wheat Purchase Study
Simulation 2A Example – purchase a month of usage every
month:
- Dec 5, 2013 - buy July HRW wheat futures at the
market equal to June usage.
- June 27, 2014 – sell futures amount equivalent to one
months usage.
- Jan 1, 2014 buy month of usage, July 28, 2014 sell
month of usage.
Equal Monthly Purchases (HRW)
250
192
200
150
Cents/bushel
100
47
50
0
-27
-50
-33
-31
14
Ave
-48
-73
-100
-119
-150
-200
-188
-250
07
08
09
10
11
12
13
Oman Wheat Purchase Study
Simulation 2A :
Simulation Results:
- December 2007 through Dec, 2014
- Futures range from $1.88/bu loss to $1.92/bu profit
- Average loss for period of $0.31/bu
Oman Wheat Purchase Study
Twenty Year Simulation – What would it look
like?
Yearly HRW Hedge Results
500
400
381
300
267
225
192
200
Cents/bu
152
117
97
100
45
17
32
4940
25
47
32
12
0
-4
-17 -22
-39
-50
-100
-18-15
-30
-26
-27
-65
-84
-33
-48
-73
-85
-107
-119
-142
-200
-179
-188
-245
-300
96
97
98
99
00
01
02
03
04
All Dec 1
05
Equal Mo
06
07
08
09
10
11
12
13
14
Oman Wheat Purchase Study
Looking back twenty years:
Simulation Results:
- All front end wheat usage hedged resulted in a $2.45/bu
loss to a $3.81/bu gain
- Monthly hedging usage strategy range was between a
$1.88/bu loss and a $2.67/bu gain.
- Five year average
Summary HRW Hedge Results
30
25.41
25
20.40
Cents/Bushel
20
15
11.86
11.09
10
6.40
5.35
5
4.00
0.88
0
20 Yr
15 Yr
All Dec 1
10 Yr
Equal
5 Yr
Oman Wheat Purchase Study
Summary and Conclusion:
- Following a consistent hedging program is a viable
mechanism in managing price volatility and should be
implemented.
- Spreading out the execution of a hedging strategy over a
period of time provides a more efficient hedge.
- The use of Options in wheat procurement hedging is a
viable method of providing a sound hedging mechanism
that also provides transparency.
- More finite management of hedge positions could provide
even more advantageous results.
Commodity Price Risk Management
A Procurement Plan built on price prediction will be volatile
and will add risk to your business.
The goal of hedging is to eliminate price fluctuation risk, using
proven risk management tools and approach.
Consistent adherence to price risk management practices
provides long term viability to those exposed to market
volatility.
Disclaimer
This material is a solicitation to enter into a derivatives transaction. The information and
data contained herein have been obtained from sources believed to be reliable but Advance
Trading Inc. ("Advance") does not warrant their accuracy or completeness.
Recommendations and opinions contained herein reflect the judgment of Advance as of the
date hereof, are subject to change, and are based on certain assumptions, only some of
which are noted herein. Different assumptions could yield substantially different results. You
are cautioned that there is no universally accepted method for analyzing financial
instruments. Advance does not guarantee any results and there is no guarantee as to the
liquidity of the instruments involved in our analysis. Advance, its affiliates, and its and their
officers, directors, and employees may sell or purchase, for their own account or for
customers, positions in futures, options or other instruments which may be similar or
different from the positions referred to herein. As a matter of policy, Advance does not give
tax, accounting, regulatory or legal advice to clients. Clients therefore should consult their
own advisors regarding the tax, accounting and legal implications of the recommended
strategies before transactions are affected. Trading commodity futures and options involves
significant risk and is not appropriate for all investors. Information relating to past
performance is not necessarily indicative of future results.
Reproduction in any form without Advance's express written consent is strictly forbidden.
Trending Higher - Hedging Examples
1050
950
Cents / Bushel
850
Futures Hedge
1)
Buy futures at $5.19/bu to hedge cash purchases in six months.
2)
Sell futures at $8.02/bu, gain of $2.82bu.
Purchase cash.
Sell futures at $8.02/bu to hedge cash purchase until sold
3)
¼ cash sold, buy ¼ futures at $8.59/bu, loss of $0.57/bu
4)
¼ cash sold, buy ¼ futures at $8.69/bu, loss of $0.67/bu
5)
¼ cash sold, buy ¼ futures at $8.86/bu, loss of $0.84/bu
6)
¼ cash sold, buy ¼ futures at $9.33/bu, loss of $1.31/bu
Average: futures price of $8.87/bu, loss of $0.85/bu
750
650
550
450
1
6
3
2
4
5
Trending Higher - Hedging Examples
1050
950
Cents / Bushel
850
Option Hedge
1)
Buy 520 call option at $0.58/bu to hedge cash purchases in six months
2)
Sell call option at $2.82/bu, gain of $2.24/bu.
Purchase cash.
Buy 800 put option at $0.59/bu to hedge cash purchase until sold.
3)
¼ cash sold, buy ¼ put option at $0.18/bu, loss of $0.41
4)
¼ cash sold, buy ¼ put option at $0.13/bu, loss of $0.46
5)
¼ cash sold, buy ¼ put option at $0.05/bu, loss of $0.54
6)
¼ cash sold, buy ¼ put option at $0.01/bu, loss of $0.58
Average: Option price of $0.09/bu, gain of $0.50/bu
750
650
550
450
1
6
3
2
4
5
Trending Lower - Hedging Examples
900
7
Cents / Bushel
850
800
Futures Hedge
7)
Buy futures at $8.79/bu to hedge cash purchases in six months.
8)
Sell futures at $7.18/bu, loss of $1.61bu.
Purchase cash
Sell futures at $7.18/bu to hedge cash purchase until sold.
9)
¼ cash sold, buy ¼ futures at $6.89/bu, gain of $0.29/bu
10) ¼ cash sold, buy ¼ futures at $7.02/bu, gain of $0.16/bu
11) ¼ cash sold, buy ¼ futures at $7.02/bu, gain of $0.16/bu
12) ¼ cash sold, buy ¼ futures at $7.27/bu, loss of $0.09/bu
Average: futures price of $7.05/bu, gain of $0.13/bu
750
12
8
10 11
700
9
650
Trending Lower - Hedging Examples
900
7
Cents / Bushel
850
800
Option Hedge
7)
Buy 880 call option at $0.76/bu to hedge cash purchases in six months
8)
Sell call option at $0.04/bu, loss of $0.72/bu.
Purchase cash
Buy 720 put option at $0.35/bu to hedge cash purchase until sold.
9)
¼ cash sold, buy ¼ put option at $0.46/bu, gain of $0.11
10) ¼ cash sold, buy ¼ put option at $0.37/bu, gain of $0.02
11) ¼ cash sold, buy ¼ put option at $0.35/bu, gain/loss of $0.00
12) ¼ cash sold, buy ¼ put option at $0.23/bu, loss of $0.12
Average: option price of $0.35/bu, gain/loss of $0.00/bu
750
12
8
10 11
700
9
650