Commodity price movements are becoming larger and sharper and farmers need to do more to protect their businesses from the effects of volatility, says Alexis Pouyé, managing director of ODA.
Wheat from the 2010 harvest traded in a £120 range, giving the potential for a 250ha farm growing 60% wheat at 7.5t/ha to lose out up to £135,000 of potential revenue. Price risk management is just as important for buyers.
Farmers need to spend more time gathering information, analysing it, forming an opinion of the market and then developing a strategy based on an assessment of risk, says Mr Pouyé.
“Volatility in some years will clearly create opportunities but in some years it will create big difficulties.
“For the supply chain, until 2007, quality and on-time delivery were the only issues, there had been 15 years of flat prices. Today the price can change 6% or 8% in one day. The real fear is to be short of supply.
“Historically, cereal prices were less volatile because of intervention. Changes in the CAP have created sensitivity to volatility and with no security (from intervention) buyers and sellers have to react.”
Apart from this, shifts in policy, demand and uses for grains and oilseeds have changed the nature of trade and of price fluctuations. For example, the importance of export markets in the past means that rapeseed price movements were previously very closely related to the euro/US dollar exchange rate. However, since 2005 this is no longer the case because EU oilseed rape production is now all crushed within the EU.
When grain prices shot up in 2010, the problem was not the quantity of grain in the world but that not enough of it was available to be traded, says Mr Pouyé.
“A small proportion of trades make the price of everything – one big trade with Egypt or Baghdad will mark the world price and everything else follows on from that.”
Currency plays an important part but other factors can have a big effect. The cost of freight is easing slightly now but has fluctuated dramatically over the past few years.
“Demand is not the biggest element in price volatility – demand is fairly easy to model. Supply is much more difficult because of the variation in yields.
“Once a crop report comes out, the market is moving already – farmers need to have anticipation of the markets so they can take action before the information comes out.”
Why do prices fluctuate so much?
• Supply and demand – swift reaction to market intelligence, especially at time of relatively low world stocks
• International trades – set the marker for other trades
• Changes in policy – eg switch to biofuels, diminishing profile of intervention
• Economic laws
• Changes in freight costs and availability
• Exchange rates
Learn to reduce risk
ODA runs training courses to help growers understand market information and the tools available to protect their price risk. An important part of this is how to use futures and options to cover that risk.
“We’re don’t always reach the highest point but we have never made the big mistakes. Futures markets are not a miracle, they are safe and transparent and used as a price reference, but you do need to have cashflow to use them.”
Using the futures market to hedge or protect a risk correctly means taking an equal and opposite position to that held in the cash or physical grain market, says Mr Pouyé.
Insurance against adverse price movements can also be bought through an options contract which allows a grower to fix a minimum price. For this he pays a one off premium – if he does not need to claim on this insurance, it expires after a set period.
Using options is likened to insurance, where a premium is paid and the understanding is that this will be lost at the end of the insurance period, but that premium gives the policyholder the chance to claim if necessary.
All about ODA
ODA is a privately owned French company offering training, market analysis and advice.
It is in close contact with growers in many countries to help form an opinion of likely supply. The company wants to spread and increase this network of growers to build up accurate information on crop production.
Most of its customers (85%) are farmers, both growers and livestock producers, but it also serves millers, maltsters, food processors, co-ops, merchants, investors and bankers.
• Formed in 1997 by a farmer after seeing effects of a big French grain market company collapse
• 10 market analysts
• Offices in France, UK, Ukraine and Poland
• Plans to expand to Russia, Hungary, Romania and Germany and ultimately to have a presence in every producing and exporting country in Europe and Black Sea region