Aegic's glossary of grains industry terminology and key concepts

Everything you have always wanted to know, but were too afraid to ask.

 
 
  Grain Quality & Functionality

Grain Quality & Functionality

  Market & End-Product

Market & End-Product

  Trading - Derivatives Markets - Grain Contracts

Trading - Derivatives Markets - Grain Contracts

  Supply Chain & Logistics

Supply Chain & Logistics

bread and wheat.jpg

Soft Wheat
Soft wheat is lower in protein and therefore good for making products such as - cookies, cakes or tempura batter. Some common Soft Wheat grades include Western White (USA) and Australian Soft (Australia).

Hard Wheat
Hard wheat is generally higher in protein than Soft Wheat and used for products such as bread, ramen noodles and other yellow alkaline noodles (such as Hokkien noodles). Common grades include Dark Northern Spring (USA), Canadian Western Red Spring (Canada) and Australian Prime Hard (Australia).

Noodle Wheat
Usually refers to Soft Wheat used to produce Japanese udon noodles. The only areas that are able to produce suitable noodle wheat are Western Australia (Australian Noodle Wheat grade) and parts of Japan such as Hokkaido (mainly a variety called Kitahonami)

Winter wheat
Winter Wheat is sown in the fall, lies dormant in the winter, before being harvested the following spring or summer.  Winter wheats are grown in North America, Europe and Japan (Hokkaido) but not in Australia (Australian wheats are sown in the fall and grow through the winter period before being harvested in late spring/early summer)

Hard Red Winter Wheat (HRW)
A fall seeded which that can either be dark hard, hard, or yellow hard.  It is usually medium to high in protein and is used to produce bread flour. HRW production is concentrated in the lower Great Plains.

Spring wheat
In general, Spring Wheat refers to wheat that is grown during springtime and harvested in summer.  In North America, Spring Wheat has relatively high protein, making it ideal for bread flours.

Hard Red Spring Wheat (HRS)
A spring seeded wheat that includes the following three subclasses: dark northern, northern, or red.  HRS is typically high in protein and is used primarily to produce bread flour.  HRS production is concentrated in the upper Great Plains.

White wheat
Usually autumn or spring seeded and includes four subclasses: hard, soft, club, western (WW).  Domestically in North America it is mainly used for pastry flours and in Japan white wheat is used to make cookies and cakes.

Falling Number    
A test which is usually conducted on rain-affected grain that measures how much of the sample has begun sprouting.  This is an extremely important test for flour millers and malt-houses, as sprouted grain can cause dramatic problems in the end products.

Ash Content
Refers to the percentage of minerals by weight in wheat. In wheat, ash is primarily concentrated in the bran and is an indication of the flour yield that can be expected during milling.  Ash in flour can darken certain end products.  For example, low ash is extremely important for the production of Udon Noodles, which are prized for their creamy golden color.

Test Weight
A measure used on grains such as wheat, barley and oats to determine the weight of a given volume of grain. The grain is poured into a chondrometer (a steel measuring tube) to determine the weight. A higher value is generally better as it indicates better milling yield and less husk or chaff.  Measured in kilograms per hectoliter weight.  For example, a typical wheat Test Weight could be 80kg/hl.  For commodities such as milling oats, Test Weight can be the single most important quality parameter. 

Protein content
This is a vital aspect of most grain contracts as it is the best indicator of the functionality of the grain. For example, if a flour mill purchased wheat to mill into flour for bread-making and they received 9% protein wheat instead of 13% protein, the flour would produce virtually inedible bread. Hard wheats are generally sold around 11.5-13.5% protein, while soft wheats can go anywhere as low as 8%

Uniformity
Conformity within and between shipments for a particular commodity.  Uniformity is extremely important for end-users.  If they receive one shipment of a particular quality and another of dramatically different quality, it creates problems for their customers using the flour, for example.

Milling yield
This refers to how much end product a given quantity of unprocessed raw grain will be able to produce. A higher milling yield translates directly to the miller’s bottom line.

Foreign Material
Material found in a given sample of grain which does not make up any part of that particular grain.  For example – rye grass seeds in a wheat sample.

Moisture Content
The amount of moisture contained in a particular sample of grain.  Grain is typically higher in moisture when first harvested and gradually loses moisture as the crop year progresses.  Depending on the commodity, both low moisture and high moisture can be a problem.  For example, buyers of milling oats often prefer Australian oats to Canadian oats due to lower moisture (14% v 10%) as this translates into better milling yield.  However, on the other hand oil crushers often prefer Canadian canola to Australian canola because Aussie seed has such low moisture that it can cause issues when crushing.

Defects
Usually refers to the amount of damaged grain and foreign material in a given sample.

Dockage
Material that can be screened out of a given sample of grain, using accepted screening equipment.  This term is not used on grain contracts in Australia, with terms such as screenings (for non-millable material originating from the commodity itself) and Foreign Material (non millable matter that does not originate from the commodity being traded)

 

W06_0383 Golden wheat heads.jpg

Yellow Alkaline Noodles
A major category of noodles consumed in Asia where alkaline salt is added in the production process. Major variants include ramen and Hokkien Noodles.

White Salted Noodles
Technical term for udon noodles

Shochu
Shochu is a type of distilled spirit consumed by Japanese people. Shochu can be made either from barley or from potatoes. Shochu is therefore another potential destination for high quality barley.

 

P13_6517 Wheat Products.jpg

Enter Glossary terms here

 

9 supply chain.jpeg

Futures

The futures market is a vital part of the grains industry and functions as a critical risk management tool.  In theory, futures and other derivative products  provide two main functions.  Firstly, they allow participants to lock in profit when it is at an attractive level.  Secondly, it allows participants to partially remove market risk from the equation, so that revenue has a lower at-risk component and thus determined more by production-side factors that are better controlled by the producer (weather events notwithstanding).  So participants can focus on generating revenue the traditional way (via competitive advantage, selling for a margin etc).

The futures contract for a particular grain or grade of grain is for delivery in a particular month. For example, in general terms “Australian Wheat July Contract” would be for a particular grade of wheat, for delivery to a particular location and would expire at the end of July.

So, how does the futures market enable you to manage risk? Let's use the example of a company that buys a large quantity of grain from farmers at harvest. They are now ‘long’ this grain and must hold it until they sell it. While they are holding it, if the price collapses, the grain buyer stands a chance of going bankrupt or at least losing a large amount of money. However, what they usually do is take an equivalent ‘short’ position on the underlying (or at least, correlated) market, which means they are then ‘neutral’.  So, if the price of that grain rises, they make money on the physical grain they hold and lose the same amount of money on the futures contract. If the price of the grain drops, the opposite occurs. This does not completely eliminate all risk though. There still remains the risk that the futures price can diverge from the cash price (this difference is called ‘basis’).

“Taking a View”

The grain trader can also ‘take a view’, whereby they leave a portion of their position ‘unhedged’ (meaning, not offset by any derivatives contract such as futures). For example, if the trader had a ‘view’ that wheat prices were going to increase, they may elect to leave a portion unhedged. This could mean, for example, that they hold 100,000 metric tonnes of physical wheat but only take out short futures position for 50,000 metric tonnes. So if they price of wheat does in fact go up, they make more money. As the world grain market is so transparent, with few opportunities for ‘easy money’, taking a view is often one of the only ways a grain trader can make decent profits, however the risks are naturally greater than simply "clipping the ticket" (buying, then selling for a small margin).

Actual 

The actual physical commodity (wheat, corn etc.), as opposed to a futures contract or other derivative.

Bid & Offer

Officially lodging interest to buy a certain quantity of a certain commodity or derivatives contract at a certain price is called making a Bid.  On the other side is the trader ‘offering’ something for sale.  Once Bid & Offer agree, a trade is usually then concluded.

Call Option

An option that gives the buyer the right to buy a certain derivatives contract at a specific price called the strike price on or before the expiration date of the contract.  Both Call and Put options give the right, not the obligation.

Carry Charge

The cost of holding the physical commodity, including interest and storage charges.  For example, Company A buys $10m worth of grain from farmers at harvest and sells the grain 6 months later.  They need to pay interest on the $10m and also any storage charges payable for holding the grain during that period.

Carryover/Ending Stocks

Any stock of physical grain not sold during the marketing year of that particular geographical region.  What remains is called the Ending Stocks and is then ‘carried over’ to the next year.

Expiration Date

The date that a contract or option expires.  Futures contracts will usually expire on the last day of that particular month. E.g. – the July contract would expire at the close of trade on the last day of the month.

Forward Contract

A contract between two parties to deliver a specific quantity of a specific commodity to a specific location at a specific date in the future.

Fundamentals

Factors that affect the price of a commodity related to actual real world events such as – weather or changes in government policy.  For example – if Argentina suddenly stopped the export of soybeans, this would be a change in the ‘fundamentals’ that would influence price.  This is opposed to ‘technicals’.  A technical factor would be, for example, a dramatic drop in the price of soybeans, leading to an oversold condition and a potential rebound in the price.  Fundamental Analysis is analyzing the fundamentals to create a view on the direction of prices in the future or current situation.

Hedging

Hedging is the use of derivatives or foreign exchange trading to reduce the risk of price fluctuations.

Inverted market

An Inverted situation is usually caused by a temporary shortage in the physical commodity which leads to front months (contracts expiring sooner) being more expensive than the distant months.  Usually the opposite prevails.

Limit Up or Limit Down

This revers to the maximum upwards or downwards move that a particular contract can make in one day.  Unlike company stocks, most futures contracts have fixed daily maximum movements set

Margin Call

This is triggered when trade goes against a participant to the extent that their original margin (the amount they had to deposit to make the derivatives trade) does not sufficiently cover the minimum level required by the provider of the service.  For example, in simplistic terms, to put on a $1m position to go long USD/EUR pair, the service provider or institution may require 1% of the amount as a ‘margin’.

Nearby Month

The nearest (or soonest, to put another way) delivery contract month of a particular futures contract.

Deferred Month

Delivery months for a given contract which are later than the current ‘nearby’ month.


Open Interest

Open Interest is the total number of buyers and sellers sitting in the market for a particular contract who have not yet been executed at their target value

Option

An Option, in the trading context, is the right, but not the obligation, to buy or sell a particular futures contract at a specific price during a specified time period.

Roll Over

The transition from one delivery month in a futures contract to the next month.

Short Covering

Short covering typically occurs when someone is short a particular contract and it starts to rally higher, leading to losses.  When a particular stop-loss is triggered, that person will need to ‘short cover’ by buy the contract to get neutral.

Spread

In trading, spread really just means ‘the difference’, in any context.  For example, the spread between $1 and $3 = $2.

Squeeze

A squeeze occurs when traders are forced to exit the market at the same time, often in a panic.  It is called this because they are all trying to squeeze through a narrow door at the same time to find the exit.  During a squeeze, there are a lack of people on the other side of the trade (i.e. – those who want to buy when you want to sell and vice versa), so often unfavorable prices result.

Stop

A stop is a predetermined point at which a transaction will be triggered.  Stops are primarily a means of limiting losses via a ‘stop loss’ which is a point which corresponds to the maximum amount the trader is prepared to lose.

Strike Price

The price at which that particular futures contract can be bought or sold.  For example, an option to buy July MATIF rapeseed at 390 Euro.

Volume

Refers to the total number of trades on a given day (or other period of time). 

Bear Spread

Usually means selling the nearby contract month (ie – going short that month) and simultaneously buying the deferred month.  By entering into this trade, the trader believes that the value of the deferred month will increase relative to the nearby month.

Bull Spread

The opposite to Bear Spread.  A Bull Spread involves buying the nearby month and selling the deferred.

Derivative

In the context of the grain market, a Derivative is a type of financial instrument, the price of which is linked to the price of an underlying commodity.  The main example would be a futures contract linked to a specific commodity.

Hog/Corn Ratio

A measure comparing the cost of feeding corn to hogs to the dollar value of the hogs.  It is created by dividing the price of hogs by the price of corn per bushel.

Inter-commodity Spread

This involves the simultaneous purchase of a contract in one futures market and the sale of a contract in another market.  The two markets can either be closely related or have much less correlation.

The purchase of a given delivery month of one futures market and the simultaneous sale of the same delivery month of a different, but related, futures market.

Calendar (or Inter-delivery) Spread

This is the simultaneous purchase of one delivery month for a particular futures contract with the sale of another delivery month of the same commodity on the same exchange.

Market Order

An order to buy or sell a particular contract or commodity at the current prevailing price in the market.

Mark-to-Market

In futures trading, this means to credit or debit a trader’s margin account based on the closing price from each day of trading.  More generally, Mark-to-Market means to update the value of a particular instrument at a set interval – usually also at the end of a trading or operating day.

Price Discovery

This is where the true price of a commodity is ‘discovered’ through normal market processes.  Put another way, when a group of buyers and sellers meet and settle on a price, the price is ‘discovered’ through that process.

Volatility

A measurement of the amount of price change across a given period of time.

Volume

The total number of trades for a given commodity or contract, for a given period of time – usually 1 day.

Basis

Basis is the difference between futures prices and cash prices. This can increase or decrease due to many factors. So, for example, at a particular point in time, it may be cheaper to buy tonnage through futures than to buy via the cash market. This can be a kind of arbitrage.

Arbitrage

Arbitrage (or ‘Arb’) is when price distortions emerge which may present opportunities to make profit. The classic example is if you have two counties in the US. One county has a tax on alcohol and the other one doesn’t. You can ‘arb’ this market by crossing county lines, purchasing the alcohol and immediately selling it back in the county with the tax. Arbitrage is extremely common in the grain market. One example could be to identify a parcel of grain at one grade which actually has the characteristics of a higher grade and selling it as a higher grade.

yuppies3.jpg