26 April 1996

Cut risks and invest in futures exchange

MORE farmers should consider using the futures market to reduce financial risks, says Doug Thow, agricultural manager at the London Commodity Exchange.

As the only grain futures exchange in Europe, the LCE saw a record volume of over 1700 lots (each 100t) of feed wheat traded last Thursday (Apr 18).

Much, as usual, was on behalf of merchants, compounders and shippers. But an increasing number of farmers are looking to the exchange to protect themselves against adverse price movements in the underlying physical market.

And this will become more important in a grain industry more characterised by uncertainty, as free-market factors and world competition increase.

"A grower who decides to store grain after harvest may want to avoid the possibility of selling on a falling market," explains Mr Thow. "As a means of protection, he can hedge by selling futures contracts.

"The level of return will, therefore, be stable, regardless of the end-price received on the physical market." (Of course, such hedging also removes any windfall gain.)

The record volume at the LCE was accompanied by rising prices as demand rose for UK wheat in Europe. July futures closed last Thursday at over £132/t.