12 May 2000

Make budget first essential factor for successful strategy

FARMERS are finding it increasingly difficult to make budgets at ever-decreasing prices.

But Gary Bright, managing director of South Shields-based GrainCo, insists that a budget is the first essential element of a marketing strategy.

"Many farmers know that unless they get above average yields this summer, they will be losing money."

Without a budget, farmers have no control over financial performance, warns Mr Bright. They may then be forced into untimely sales because they are not aware of cash requirements.

"We have a classic situation this year. Many farmers sold in January/February when the market had not moved for five months, simply because they needed the cash flow. When the market moved up at the end of March and into April, they missed out on higher prices."

It is also frustrating, says Mr Bright, to see those who draw up a budget fail to act on it. Once the market price, spot or forward, reaches the target in a rising market, many think values will continue to climb.

There are many ways to reduce risk, including pool marketing. "Pools in general have proved to be a good option," says Mr Bright. "In the better ones, prices are definitely above average."

There are other ways of selling grain which offer a cash advance even though the final price may not be fixed.

Some growers stick to traditional methods of risk reduction, such as selling equal monthly quantities of grain through the season. "The result of that policy this year is about £2/t below our pool average – it is not a disastrous one," says Mr Bright. But many growers do not have the volume or the storage to enable them to market in this way.

Grain options are a way of taking an acceptable price, while retaining the right to benefit from improvements in the market. There is a cost to this, about £3.50-£4/t plus traders margin, which most growers find unacceptably high.

"Our experience has been that farmers are willing to pay a £1.25-£2/t marketing charge to a pool, with no minimum guaranteed price, but they are not willing to pay double that to guarantee the bottom line," says Mr Bright.

"This scenario may have to change in the coming years as the banks may require growers to have guarantees on expected returns. Minimum price contracts will also become more attractive as volatility increases.

"For the second year running, world wheat production will fall below consumption and at some time this market will have to turn around. Farmers have probably got to survive another two seasons before that happens."

The market has moved within a range of just £7/t this season, compared with £30/t the previous year and £46/t the year before that.

Some merchants offer minimum guaranteed price contracts which are a farmer-friendly development of options, where the merchant takes the option and passes some of the benefit of favourable market movements to the grower.

"These have worked well over the past three years. The eventual turnaround of the market will lead theoretically to bigger bonuses and this is the time the farmer will have to rely on the honesty of the trader in passing back all of the benefits," says Mr Bright. &#42

Safe and sound? Or will cash flow patterns force an untimely sale?