Business

Top 10 grain market questions

Thursday 11 October 2012 09:00

AHDB/HGCA is running free grain market workshops through the autumn and winter. Here, grain and oilseed market analysts Jack Watts and Richard Veit answer the questions most frequently asked by growers at these events


What will be the price of wheat in six months' time?

This is the question on every grower's lips but is the most difficult to answer. As grain markets become less predictable, price forecasting is difficult and unreliable. Forward prices are available, but are by no means a prediction. Pricing commodities is always going to be a risk - but by understanding what's moving markets and knowing the alternatives on offer when marketing grain, at least growers can make an informed choice.

Why is my ex-farm feed wheat price at a discount to the futures price?

The UK (LIFFE) futures price relates to the price of feed wheat (72.5kg/hl) loaded, in bulk, to the buyer's lorry from a registered futures store - there are around 40 of these stores in the UK. The difference between the futures and ex-farm feed wheat price is partly because of haulage and handling costs, partly because of the strict 72.5kg/hl specification - no fallback is available on wheat tendered into the futures system.

Who determines the cost of an option and why are they expensive?

Option premiums tend to follow a mathematical formula called the Black-Scholes Model, which weighs up probability and risk. The cost of an option will also be influenced by the attitudes of buyer and seller toward the risk and depends on the length of time the option has to run and the price at which it is set relative to the current futures price.

Can I trade futures and options directly?

This is only possible for those who meet the strict financial conditions. For most farmers, it is not advisable to trade futures directly as large cash deposits are required. Also, if the market moves against you, you will have to make up the difference with further cash deposits known as margin calls. Those who want to open a futures account should be aware that it is a complex process with strict financial criteria to meet.

How can I hedge my barley price?

With no futures market, the UK barley market is less transparent than that for wheat. Feed barley has a relationship with wheat as the two grains compete for animal feed demand but that relationship is not necessarily consistent - feed barley can trade at anywhere between £0/t and £30/t lower than feed wheat. Farmers with both feed wheat and feed barley to sell can use this relationship to help them decide which commodity to sell first.

For example, if feed barley is priced the same as feed wheat, then feed barley is strongly priced and the risk is not only from a fall in the relationship between feed barley and feed wheat but from a fall in the market overall.

What is the best marketing strategy?

There is no one-size-fits-all strategy. Every farmer will have different considerations - for example, costs of production, cashflow needs, storage, workload and the management time demanded by different strategies. Typically, the more diverse a strategy, the more resilient it will be.

How much should I sell forward?

There is no hard and fast rule that says a certain percentage of the crop should be sold forward pre-harvest and there are alternatives to price-fixed selling. Make sure you understand the terms and conditions of any contract before signing. HGCA publishes a Cereal Sellers' Checklist to help growers avoid common contractual issues (available on www.hgca.com under the Markets page).

What impact is the eurozone crisis having on grain markets?

The main impact is through currency exchange rates - a weaker euro against the US dollar actually supports European prices but as the euro has also weakened against the pound, the UK price has been hit. Issues in the eurozone also affect global economic confidence, which can influence how speculators behave.

How do speculators affect the market?

This is a long-running debate. In general, speculators base their positions on supply and demand, so price movements may be amplified in response to new information such as US maize plantings or yield data. Wider economic events also affect investor confidence.

What drives the oilseed rape price?

Oilseed rape fits into what is known as the "global oilseed complex" where it competes for demand with other oilseeds such as soya bean, sunflower seed and palm oil. The UK is part of the European rapeseed market; there is no UK-based futures market. Domestic prices follow the Paris futures market.

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