Mitigating risk from volatile grain markets means arable farmers should consider grain prices in three seasons at any one time, according to HGCA.
“You can’t influence prices, but you can manage the opportunities,” HGCA economist Jack Watts told farmers at the recent Wessex Grain annual conference in Salisbury. “You need to be just as good at managing price risk as you are at managing production.”
There was no one-size-fits-all strategy to insulate all farm businesses against tumbling grain prices, Mr Watts said. But without taking some form of protection, farmers were exposed to market risk as soon as they committed to buying seed and fertiliser.
“On futures markets, UK wheat has a three-year pricing window. So farmers should have three pricing seasons on their minds at any one time – the 2009 harvested crop, the crop in the ground now, and the crop you’re going to drill this autumn.”
Most of all, farmers should try to avoid being pressured into making “forced” sales, due to limited storage or to prop up cash flow, Mr Watts said. “Anyone who hasn’t sold anything forward for 2010 is now 100% exposed to market risk.
“Consider having a target price based on your cost of production and sticking to it. Assess your risk and identify the level of exposure you’re comfortable with.”
Four-fifths of the world’s wheat was grown in the northern hemisphere, Mr Watts said. “For example, maize has a much more uniform supply throughout the year. And the period from March-July will be key in the northern hemisphere as much remains unknown about the size of the crop. After that, the market starts to relax, so it’s important to take advantage of that pre-harvest nervousness.”
By November, most of the fundamentals that could drive the market were already known, and through the winter and early spring market traded on the back of currency exchange rates, export shipments and fund speculation, he said.
“For example, at the end of 2009, there was no new information and the market had nothing to trade off. In the USA there was very little export progress and news of larger US grain stocks in early January caused the market to realign suddenly.”
See our Prices and Trends section for more information from the market.