Grain marketing and price risk management
Last month I was fortunate to lead a short study trip to the Offre & Demande Agricole (ODA) headquarters in Bourges, France to take part in a training course on this subject. Our group comprised AHDB members including Vikki Campbell our Market Specialists Manager, and four growers from our Monitor Farm network.
It was fair to say we all went in some trepidation at the thought of getting our heads round bulls and bears, the Futures Markets, and Call / Put Options to risk manage grain sales, with or without grain storage. I’m pleased to say that over the 2 days, the fog gradually lifted!
Point one on day one was a very familiar one; you need to know your cost of production or breakeven point. So far so good, we have AHDB’s Farmbench! We then had an interesting insight to interpreting data and the psychology of grain sales. What are the grain and oilseeds supply and demand balance sheets telling us (the latest version can be found here) – rising, falling or static grain supplies and hence relative pressure or not on the markets? As you drill and grow your crop ahead of harvest, what signs are you seeing that could enhance or detract from the forecasted trend?
Then, how just a few lines of the LIFFE Futures Market can give you a further feel for the market. On a particular day, if prices are falling from November delivery through to March delivery, grain may be short and demand may be increased, which could support prices this situation very rarely occurs in the UK – we’ve only seen it very briefly (for a day or two) once in nearly 10 years. It is much more common in the French market). If future prices are increasing in forward delivery months, which is the more common scenario we see in the UK, encouraging crop storage, then this may be an indication of a well-supplied market.
It is too long to describe all the intricacies here, but we did become familiar with how Futures, Calls and Puts can help protect breakeven prices while still giving opportunity for gaining profitably from a rise in the market. Fair to say, this needs time and management, which will breed familiarity and confidence.
We concluded there are stages on engagement.
- Understand how strong your current position is – what is your Cost of Production and what is your average basis price? Your basis represents the relationship between your local price and the futures price. It is calculated by subtracting the futures price from your local cash price. The basis is typically a negative figure, i.e. ex farm prices are usually under futures prices, but how far?
- Put and call options. More like insurance, with the aim of fixing a minimum price while remaining open to the market
- Grain futures. If you want to actively trade futures, (rather than using them to understand the market situation) you need to understand what you are doing. Certainly a consideration and with the guidance of working with a specialist company, a strategy which should not be ruled out.
As the industry works towards a post-Brexit world, the subject of grain marketing and risk management cannot be ignored. There is generally too much speculation around growing and selling the crop. This is one area where something can be done that does not rely upon the weather – just a more business management orientated approach.
This approach undoubtedly requires time and cost. It will not be everyone’s ‘cup of tea’ and hence there are real benefits to working with the professionals. That applies to anyone at the outset of a more sophisticated approach to marketing and risk management I would suggest. Clearly this is going to cost but on the evidence we saw, there is good potential to make a positive return on investment (fees). This may be just ensuring you reach your cost of production. But what price to being confident to stay in business for the long term?