DESPITE a relatively stable week in the auctions, sellers remain mostly absent in the forward markets in response to the high volatility over the last two months.
Buyers looking to hedge pre-Christmas were targeting to execute around cash.
Bidding into the first quarter has begun to come through. The 21 micron contract traded January at 1750 cents, which is seven cents over cash, but further follow-up failed to eventuate, due to lack of sellers and interest fell back 1700 cents.
Settling on an entry level to begin, or to continue, a hedging strategy is difficult. The 21 Micron Price Guide fell almost 600 cents from a season opening of 2037 cents to the low of 1444 cents. A nearly 400-cent recovery to 1828 cents was followed by another 150-cent fall to 1685 cents. We are currently lying at 1743 cents, having recovered 58 cents. Within these cycles there has been daily moments of more than 50 cents on 12 occasions.
Such volatility would indicate that a minimum price contact (put option) would be a good strategy. Unfortunately, that same volatility (over 30 percent) will make premium costs prohibitive and option sellers hard to find.
Some guidance might come from looking where the market sits at present. The 19 micron MPG at 1793 cents sits on the 76th percentile for the last 10 years, but only the 55th percentile for the last five years. The 21 micron MPG at 1743 cents sits on the 83rd percentile and the 70th percentile respectively. This would indicate that historically, 21 micron looks the better selling option to hedge at the current basis.
Early indications for the week ahead are for maintained interest on the bid side. Buyers will be looking to cover any sales in the prompt window. Lack of selling interest will most likely see execution levels above cash. The 19 micron range is 1780-1800 cents and 21 micron range is 1750-1770 cents
Indicative trading levels for next week
19 micron 21 micron
October 1795 cents 1750 cents
November 1800 cents 1760 cents
December 1790 cents 1750 cents
January/March 1770 cents 1740 cents
April/June 1700 cents 1650 cents
November 28 micron 940 cents 2.5 tonnes
December 28 micron 940 cents 5 tonnes
January 21 micron 1750 cents 3 tonnes
Total 10.5 tonnes
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