Agricultural Markets Task Force. Futures Markets

Transcription

1 Agricultural Markets Task Force Futures Markets

2 pig meat - risk management market information DLV Market Advisory Services Ir. Bart Teuwen April 2016

3 Content What to remember? Futures Market(s) on Hogs Context Change of Context Hog futures Use by farmers Intermezzo: MAS-Index Intermezzo: Risk management in the USA pork meat chain Policy recommendations Questions?

4 What to remember? Risk management is the execution of a decision based upon a certain insight derived from information Without information you don t have a clue about which position you should take on the market With information you develop an insight and a view. Through executing a risk management strategy you try to manage your cash flow in the future INFORMATION IS KEY

5 What to remember? Market information is the alfa and omega of risk management INFORMATION IS KEY

6 What to remember? Transparency and futures market are two sides of the same coin You need market information to get a futuresmarket liquid But you also need a futuresmarket to get an incentive for commercial players (companies active within the chain) to disclose marketinformation (<=> biconditional logical connective). INFORMATION FUTURES MARKET

7 Futures Market on Hogs

8 Futures Market on Hogs There are 2 Futures Markets on hogs CME, Chicago very liquid Eurex / EEX not liquid at all Correlation VEZG with CME is very weak Period to : 38,41% So basically we only have 1 futures market on hogs, that is very illiquide

9 FAHG: Contract specifications Contract size= kg (slaughtered weight) The convergence between the futures-quote (FCF) is very good with spot prices. Cash settlement upon the Hog Index

10 FAHG: Contract specifications Settlement: Cash settlement upon Hog-Index

11 FAHG: Convergence spot - futures Correlations Westvlees - Eurex/EEX Vion - Eurex/EEX VEZG - Eurex/EEX 95,303% 94,600% 96,884%

12 FAHG: Contract specifications Cash Settlement is a very elegant way to force the futures-price to converge with the spot price Question is: where do we settle against? Are these prices reflecting the real market? Preferably derived from a real negtotiation? Are these prices subject to manipulation? Some will identify the Eurex/EEX-contract as too German The other possibility to settle a futures contract is through physical delivery

13 FAHG: Contract specifications Cost of transaction in USA is 10 times lower then Eurex/EEX USA: 3 cents per pig Eurex/EEX: 26,6 cents per pig Cost of transaction may be acceptable to farmers and speculators. It isn t for packers, nor processors!

14 So, we have a very good correlating futurescontract, that is too expensive and very illiquid In a context where the whole industry is facing a lot of risk, with barely no tools to manage that risk

15 Context Change of Context Marketplace = Spot + Forward + Futures During recent years the forward market on the sales side of packers has increased, mainly on the export. But also on domestic markets the interest to contract forward increases. However, there is barely no forward contracting between farmers and slaughterhouses

16 Context Change of Context In a context of price volatility competing companies tend to show herd behaviour Price volatility didn t bring any distinctive pricing policy between competing companies (although price volatility is an opportunity to differentiate) However, we do see different reactions on offering (or not) forward contracts in the feed sector

17 Hog futures - Use by farmers

18 Hog futures - Use by farmers 2012: Pig Trading Company cooperative initiative Hedging the crush margin Elaboration of a hedge protocol Gaining more insights on how pig and pork markets function

19 Hog futures - Use by farmers Hedge Protocol

20 Hog futures - Use by farmers Conclusions Hedge Protocol gives a handhold/grip to evaluate quotes on the futures markets By simultaneous taking position on feed and meat it s possible to hedge the crush margin Although hedging feed requires cooperation (because of magnitude feed lots contract size) Liquidity on hog futures is very, very poor (not existing!) Overall financial result is positive Besides the financial result farmers are VERY enthousiastic about the gained insights in the market Farmers are also VERY convinced of the importance of objective, accurate and up-to-date market information...

21 Hog futures - Use by farmers Conclusions... Farmers are aware of the fact that hedging is not a binary decision. There is a lot of space between 0% and 100% Farmers do evaluate the cooperative way of hedging as positive Forward contracts have 3 big disadvantages compared to futures markets futures market is anonymous: it s possible to execute your risk management strategy without exposing your position or strategy Futures market eliminate counter party risk Futures markets are flexible (on quantity and time)

22 Intermezzo MAS-Index

23 MAS-Index (0,3716xMW)+(0,2688xCo)+(0,2160xSB)+64,0328 MW = Milling Wheat-futures FCF, Euronext Co = Corn-futures FCF, CME SB = Soybean-futures FCF, CME Hedging-effectiveness of 95,10%

24 MAS-Index

25 MAS-Index

26 MAS-Index

27 MAS-Index

28 MAS-Index

29 Intermezzo Risk management in the USA pork meat chain

30 USA-farmers Use of futures Market

31 USA-farmers Negotiated purchase (spot): 2,6% Swine or Pork Market Formula Purchase: 38,9% Based on a major market price Based on Carcass Cutout Value Other Market Formula Purchase: 10,0% Based upon CME-futures Other Purchase arrangement: 12,5% Cost-Plus (based on corn + soybean meal) Window contract Floor contract Packer owned (27,2%) & Packer sold (4,0%)

32 USA-farmers

33 USA-farmers Hog contracting in the US developed out of the desire of large producers to manage price risk (Producer Motivations). While most of the research around AMA s has centered on the risk management area, it appears that a significant component of the rise of AMA s was the result of a desire to standardize a competitive product (Jang et al, 2009). Because large producers produced a large number of consistently high quality hogs, packers had the incentive to lock up the supply (Packer Motivations).

34 USA-packers Their Risk management can be divided into 4 categories 1. Hedging the purchase price risk deriving from marketing contracts with their suppliers 2. Hedging the purchase price risk deriving from their forward sales 3. Hedging as a service 1. to their suppliers 2. to their customers 4. Hedging their own production

35 Policy Recommendations

36 Policy Recommendations Transparency and futures market are two sides of the same coin You need market information to get a futuresmarket liquid. But you also need a futuresmarket to get an incentive for commercial players (companies active within the chain) to disclose marketinformation (<=> biconditional logical connective). European Union needs to embrace a (good functioning) futures market, including speculation (with food) A futures market is very important to lubricate the food chain, to help the commodity to move through the chain A futures market mitigates risk inside the food chain towards speculators

37 Policy Recommendations A clear and persistent policy Risk management requires attitude, education, guidance and experience (and hence time) And not only for farmers! Risk management will never be practiced by all companies - some companies will, others won t use risk management instruments No policy that impacts the market Every measure that impacts the market is distorting the futures market and destroying the faith of those who are not involved in the physical product

38 Questions? More information: DLV Market Advisory Services Rijkelstraat 28, 3550 Heusden-Zolder (Belgium) Bart Teuwen