Poultry producers can help protect their businesses from volatile wheat prices by using futures and options, according to the HGCA.
The rapid increase in wheat prices seen over the past 12 months had put poultry businesses under strain. Many went into the red as feed accounts for a large proportion of total production costs.
Speaking at the poultry breakout session at the NFU Centenary Conference, senior economist Mike Mendelsohn warned: “We have now entered a period of price volatility after 2-3 years of steady prices. Therefore, tools such as grain options are becoming essential as a form of price insurance.”
Grain options in the UK are based on LIFFE wheat futures and are basically contracts that allow producers to choose whether to go through with the sale or not.
The “Call Option” protects the decision to wait before buying wheat.
For example, the November 2008 futures price for wheat is currently at £150/t and add to this a £5/t price for basis (the relationship between ex-farm and futures prices). And as with all insurance, there is a premium which is £15/t, bringing the total to £170/t. So if the market goes up £40/t, you can still pay £170/t.
Alternately, there is a “Put Option” which captures any price drop after buying forward.
He acknowledged that the use of options does not apply to all producers. “But once you understand these tools, you can ask if your feed supplier is using these devices and then push for a deal, so you can also benefit from the option.”