Wheat Procurement Analysis Conducted by Advance Trading, Inc
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 Low High High Fourteen Year Average Volatility for Wheat = 2011 - 2015 Average Volatility for Wheat = $0.00 2016* 2015 2014
Oman Wheat Purchase Study Kansas City Wheat Price Volatility HRWWHEAT *Calendar Year To Date Low High High Fourteen Year Average Volatility for HRW= 2011 - 2015 Average Volatility for HRW= $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 2016* 2015 2014
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
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 $350 $600 $300 $496 $296
$0 1 2 3 4 5 Low 6 High 7 Range 8 9 Ave Range, $/MT $500 Oman Wheat Purchase Study
Oman Wheat Imports: 2008-2015 255,710 621,905 266,289 505,106 2,599,119 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
1 1 1 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 bestwith 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. Hedge Six Months Before Purchase With Futures or Call Options Actual Purchase Times Cents / Bushel 100 50 0 -50 -100 -150 -200 Futures ATM Option -250
1 3/ 5 1 4/ 1 0/ 5 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) 3/5/15 1/8/15 9/4/14 11/6/14 7/3/14 5/1/14 Futures 3/6/14 11/7/13 1/2/14 9/5/13 7/4/13 5/2/13
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 Cents / Bushel 150 100 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 -300 6/3/10 7/22/10 9/9/10 10/28/10 12/16/10 2/3/11 3/24/11 5/12/11 6/30/11 8/18/11 10/6/11 11/24/11 1/12/12
3/1/12 4/19/12 6/7/12 7/26/12 9/13/12 11/1/12 12/20/12 2/7/13 3/28/13 5/16/13 7/4/13 8/22/13 10/10/13 11/28/13 1/16/14 3/6/14 4/24/14 6/12/14 7/31/14 9/18/14 11/6/14 12/25/14 2/12/15 4/2/15 5/21/15 Cents / Bushel 300 Hedge One Month Before First Usage With Futures or Put Options 200
100 0 -100 -200 Futures 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 152 100 45 17 0 -100 117 97 -4
-85 -107 -119 -142 -200 -179 -188 -245 -300 96 97 98 99 00 01 02 03 All Dec 1
04 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 5.35 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 1050Futures Hedge 1) 2) 950 Cents / Bushel 3) 4) 8505) 6) Buy futures at $5.19/bu to hedge cash purchases in six months. Sell futures at $8.02/bu, gain of $2.82bu. Purchase
1 1 Trending Higher - Hedging Examples 1050Option Hedge 1) 2) 950 Cents / Bushel 3) 4) 8505) 6) Buy 520 call option at $0.58/bu to hedge cash purchases in six months 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. cash sold, buy put option at $0.18/bu, loss of $0.41 cash sold, buy put option at $0.13/bu, loss of $0.46 cash sold, buy put option at $0.05/bu, loss of $0.54 cash sold, buy put option at $0.01/bu, loss of $0.58 Average: Option price of $0.09/bu, gain of $0.50/bu 6 3 4
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) cash sold, buy futures at $6.89/bu, gain of $0.29/bu 10) cash sold, buy futures at $7.02/bu, gain of $0.16/bu 11) cash sold, buy futures at $7.02/bu, gain of $0.16/bu 12) cash sold, buy 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 . . . . . . . . . . . . . . . . .
Follow the instructions to open your SAFE account and download the funding letter. Provide that letter to your college. September 2017. ... Know that summer term CCP courses may not be used to bring a student into compliance with the...
Allocating Security Analysts to Cyber Alerts Using Markov Games. Noah Dunstatter. Joint work with: Dr. Mina . Guirguis, Alireza . Tahsini. Hello everyone! My name is Noah Dunstatter and today I'll be presenting my paper "Allocating security analysts to cyber...
A quick note for teachers. This presentation is one element of the freely downloadable lesson plan The. Water Cycle. in the Murray-Darling Basin. Comprehensive presenter notes are available in the 'notes' view of this presentation. For an accompanying student worksheet...
LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members' names is available for inspection at...
physical ways TO SEPARATE MIXTURES: NOTCHEMICALLY SEPARATED BY DOING CHEMICAL REACTIONS BREAKING ELECTRON BONDS. SIFTING (2 different-sized solids) MAGNETICS. FILTRATION (solid from a liquid) EVAPORATION (solute from a solvent
The Crucible. is an example of a modern drama that portrays events from Puritan times. Types of Drama. Tragedy. Recounts the downfall of a main character ... Types of characters - heroes, villains, and foils - used to heighten tension....
Nlets - CANDLE Grant CANDLE Collaboration between AAMVA and Nlets for Driver License Exchange CANDLE Summary Goal was to provide driver related transactions to Nlets users in a standard format Five states participated Leveraged existing infrastructure and data standards GJXDM...
The downsides of travel - traveller wear and tear. 43.76% of global business travellers say travel is more stressful than their everyday job. Health can suffer due to lost sleep and unhealthy eating habits on the road.
Ready to download the document? Go ahead and hit continue!