Regulatory changes post the Global Financial Crisis (GFC) has reduced the level of financing available to a wide range of markets. This reduction in available capital is creating opportunities that allow investors to generate higher returns with lower levels of risk than has traditionally been the case.

Merricks Capital identified one such opportunity in wheat in 2017 where the relationship between the current physical wheat price (including storage) and the future wheat price implied an annualised return of 10%+. This was highlighted in our Quarterly Thought Piece December 2016.

Theoretically the future price of wheat should be equal to the current price plus the cost of holding wheat until the later date. This is known as the cost of carry and is comprised of storage, handling, insurance and financing costs.

Global commodity merchants that would typically participate in this trade and close the arbitrage were under financial pressure and unwilling to apply capital for the duration that is required to capture this opportunity.

captureMerricks Capital Returns 20+% to investors in 9 months in 2017

Utilising Merricks Captital’s unique skill set and global commodity platform, we were able to acquire and store physical wheat and sell US wheat futures forward 9 months at a 20% premium. Storage costs equated to a 9% cost which left 11% physical carry net return plus a basis appreciation return of 10% for buying Australian wheat (rather than US wheat) that had become too cheap relative to the global wheat market.

Wheat Cash and Carry 2018

A similar opportunity for 25% returns currently exists in the United States where forward wheat prices are trading beyond the full cost of physical storage and insurance. Returns are optimised by buying during the highest supply period (harvest) when local premiums are lowest, holding and selling later when supplies are low and local premiums are higher.

Adam Davis

Author Adam Davis

Adam is the portfolio manager for the Meat & Livestock and Special Opportunities funds and is responsible the Soft Commodities Strategy’s research and trading process. Prior to joining Merricks Capital in 2008, Adam held senior roles in commodity management and trading at major Australian food companies including Peerless Foods, Goodman Fielder and George Weston Foods. In these roles, Adam was responsible for the management of physical commodity trading, commodity risk management, foreign exchange trading and bulk shipping logistics. Adam has 20 years’ experience in commodity markets, with specialised knowledge of commodities logistical arbitrages; quality spreads, processing margins and crop cycles. Adam holds a Bachelor of Business (Finance) from Charles Sturt University.

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