24 July 2002

Its all in the CD and its fun! say HGCAs Julian Bell (left), Marie Skinner and Gerald Mason. Playing the game can provide a valuable insight into grain options and improve farm businesses, they believe.

By Andrew Swallow

HOW much have you spent on variable inputs for wheat? If it is about £235/ha (£95/acre) you could have lost the same amount by failing to market the crop as well as you might, says HGCA economist Gerald Mason.

While that huge discrepancy is easy to pinpoint in hindsight, similar swings are not out of the question in future. To help growers cope with volatile and depressed grain markets the HGCA launched a CD-ROM grain marketing game last week.

It aims to help growers develop market strategies that take account of a minimum acceptable price to keep the business viable and encourages the use of option contracts to guarantee prices.

In the absence of any realistic state support for grain markets creating a guaranteed price is very important, believes Mr Mason. "There is no right or wrong way to market grain. But by using options you can give yourself the equivalent of a state guaranteed price. It is now up to you to give your farm the price guarantees it needs to stay in business."

From the privacy of the farm office growers can run through the marketing year with a virtual crop, using put or call options to hedge spot or forward sales and hence manage the risk in marketing their crops, he explains.

Players are given key market information as the game progresses, and in a matter of minutes the impact of their decisions on the final price for the crop becomes clear.

By running through the same marketing year more than once growers can see how different strategies may have improved, or reduced, their returns. "If you play it five or six times how the options work becomes crystal clear," says Mr Mason. A tutorial on the CD explains how options and futures contracts operate, and another section discusses managing risk.

Ten marketing years are available to play on the CD-ROM game, four based on the actual marketing years for harvest 1998 to 2001, and six on imaginary scenarios. Each marketing year starts in April, before harvest, and ends the following May.

Making full use of that marketing year, to maximise the opportunity to achieve your target price, should be part of the game plan both on the CD and in real life, he stresses.

"For any given month there is a year and a half available for you to sell at a fixed price to your merchant or co-op. Asking about prices for the 2003 crop when you are discussing this years prices costs you nothing."

For example, November wheat was worth £63/t on the futures market last week, but in the 335 days since that contract month opened there have been 173 days when the market has been £70/t or over, he points out.

Setting a realistic target price is crucial, the price the business needs to stay in business long-term, not a wishful price, he adds.

A reasonable amount of management time must then be dedicated to formulating a marketing strategy to at least achieve that.

"People spend a lot of time managing variable inputs, why not spend some more time managing your price risk?

"We realise time is precious, but you must recognise that these issues are critical to your business. You must make time." &#42

&#8226 Marketing game for growers.

&#8226 Helps understand options.

&#8226 Use options to guarantee prices for real.

&#8226 Free to HGCA levy payers: e-mail: mi@hgca.com (Tel 020-7520 3920, fax 020-7520 3972).