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Your need
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- You will be harvesting feed barley available for sale in November.
- You would like to agree a fixed price on 300 metric tonnes in AUD now for when you sell your feed barley at harvest.
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Your view
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Solution
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Benefit
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- Protects you from a fall in feed barley prices.
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Disadvantages
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Possible outcomes
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- You will receive the fixed price agreed with the Bank for your feed barley at harvest.
Examples of pricing date outcomes:
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Pricing and transaction details
After credit approval, you enter into a feed barley swap for 300 metric tonnes with the Bank. The Bank calculates the fixed price of the feed barley swap to be AUD250.00.
Upon entering into the swap transaction, the fixed price will be based off the current AUD price of the feed barley futures contract on the Australian Securities Exchange (ASX).
On the pricing date, the commodity reference price is the AUD of the feed barley futures contract on the ASX.
Assume the following on the trade date:
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Transaction amount:
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300 metric tonnes
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1 year AUD fixed price per metric tonne (calulated by the Bank):
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250.00
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Pricing date:
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November
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Payment date:
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2 business days after the pricing date
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Scenario 1: On the pricing date, the commodity reference price is lower than your fixed price.
The commodity reference price is AUD200.00 (lower than the fixed price).
Therefore, on the payment date, the Bank must pay you a cash settlement amount which is the difference between the fixed price and the commodity reference price.
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Cash settlement amount:
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300 tonnes x (AUD250.00 – AUD200.00) = AUD15,000.00
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Amount received in the physical market:
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300 tonnes x AUD200.00 = AUD60,000.00
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Net result:
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The cash settlement amount compensates you for the lower price you received when you when you sold your physical feed barley.
Proceeds from sale: + AUD60,000.00
Cash settlement amount: +AUD15,000.00
Total received: +AUD75,000.00
Or AUD250.00 per tonne (AUD75,000 ÷ 300 tonnes).
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Scenario 2: Commodity reference price is higher than your fixed price.
The commodity reference price is AUD300.00 (higher than the fixed price).
Therefore, on the payment date, you must pay the Bank a cash settlement amount, which is the difference between the fixed price and the commodity reference price.
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Cash settlement amount:
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300 tonnes x (AUD300.00 – AUD250.00) = AUD15,000.00
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Amount received in the physical market:
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300 tonnes x AUD300.00 = AUD90,000.00
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Net result:
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The cash settlement amount offsets the amount you paid when you sold your physical feed barley.
Proceeds from sale: + AUD90,000.00
Cash settlement amount: - AUD15,000.00
Total received: + AUD75,000.00
Or AUD250.00 per tonne (AUD75,000.00 ÷ 300 tonnes).
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Scenario 3: The commodity reference price is the same as your fixed price.
The commodity reference price is AUD250.00.
Therefore, on the payment date, you and the Bank have no further obligations to each other in respect of the feed barley swap transaction.
Note: Examples are used for illustrative purposes only and do not reflect current fixed or floating prices or other values or outcomes.
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