Cereals 2009: Managing the risk in turbulent times

All arable farmers face risk. But, in turbulent times, managing that risk takes on renewed importance, and Velcourt is challenging visitors at Cereals 2009 to think about how they go about it.

A series of boards around the site will dramatically illustrate the nature and degree of some of the risks of producing and marketing arable crops. These include:

  • Volatile farm gross margins
  • Wheat price volatility
  • Yield volatility – weather factor
  • World agricultural production and drought threats
  • World grain stocks
  • Fertiliser prices, rates and when to go into the market
  • Fixing SFP
  • Hedging diesel prices.

These are risks common to all arable businesses, but some are relatively new in terms of their degree, says Richard Williamson, Velcourt’s director for the south and south west.

“There are now new areas of business management risks aside from the pure farming risks. We want to focus growers’ attention on this and perhaps change the way they think about risk. Many are able to mitigate these risks to some degree. How far they go depends on the individual’s risk profile.”

Impact of risk

The boards begin with the ultimate impact of risk – volatile margins and profits. In the space of just nine years between 1996 and 2005, margins on Velcourt wheat crops have see-sawed wildly.

Like most growers, the firm has sold less wheat forward this year than usual.

“When output prices are low or flat, growers tend to sell as soon as they see a profit, maybe selling on a movement of £1 or £1.50/t. When prices are high and a profit is guaranteed, they become braver, allowing the market to rise without selling – the market might move £5/t and they still might not sell.”

Velcourt’s marketing strategy is set at bi-monthly meetings of Velcourt Marketing Services, a division of Openfield which markets almost all of the combinable crop output from Velcourt-managed farms. The trading account for this is ring-fenced within Openfield which has staff dedicated to the Velcourt account.

“We are selling forward regularly related to cost of production including the cost of land,” says Mr Williamson, who is also responsible for seed, fertiliser and pesticide procurement for the 55,000ha farmed directly by Velcourt and a further 18,000ha on which it manages the agronomy.

Marketing strategy

Giving supply commitment to end users such as Warburtons, Ryvita and malting barley buyers is an increasingly important part of the group’s crop marketing strategy.


“We also use the futures market as a tool to gain liquidity,” says Mr Williamson. “For example, if we see a futures price that looks attractive but we can’t get a physical buyer to commit to that level at the time, we will buy or sell through Openfield and then close out the contract later.

“Size also allows us to pool grain from different farms to blend quality and achieve price benefits.”

World wheat stocks have risen recently, one of the reasons behind the downward pressure on world wheat prices. “The price shouldn’t have dropped to where it is now, but nor should it have gone up to £180/t. There were other factors such as speculative investment in agricultural commodities and prices being pushed and pulled around by changing currency values.

“Looking at areas of drought in the world and at current stock levels, we think wheat could break out of its current trough and away from the flat trade which so many of the agricultural commodities are in just now.”

Farming economics

With farming interests in Eastern and continental Europe, the company reckons it is well placed to judge farming economics and planting intentions and progress on a wider scale. For example, many of the backers of farming to emerge in recent years in Russia and the Ukraine are now desperately short of funds and Mr Williamson anticipates this will have an immediate effect on productivity in these countries this year.

With cash short in farm businesses and nitrogen alone accounting for variable costs of more than £200/ha (£81/acre) this year, the firm is putting a lot of effort into assessing soil status and alternative sources of nutrients. It is also evaluating variable rate applications on one of its farms in Kent.

Velcourt has secured all its fertiliser requirements for next season although he will not be drawn on whether this is on a priced basis or not.

Fuel prices are subject to volatility, not only based on politics and supply and demand, but according to relative currency values too.

As a precaution against further increases, Velcourt hedges a proportion of its diesel requirements by installing larger-than-average storage tanks on its farms and by hedging a proportion of its requirements on the diesel futures market.

You would need to be using upwards of 1m litres of diesel to make it worthwhile using such a contract, which is executed through a broker or a bank, says Mr Williamson.

Hedge position

“We don’t commit to taking delivery of this diesel, we close out our position in the three or four months leading up to harvest.” If the price has fallen since the hedge position was taken, Velcourt pays less for the physical diesel it buys. If the price has risen, then a profit is made on the hedge position and this profit goes towards paying for the higher-priced physical diesel.

However, as with all futures trading, this exposes the user to margin calls when the market moves against them to guarantee the difference between the price at which the user goes into the market and the level to which it might rise or fall, depending on the position taken.

The price of seed supplies has also been hedged by fixing the feed grain element of the seed price for next year. A sole supplier deal with agrochemical distributor Hutchinsons secures a supply and price advantage and the firm has similar exclusive arrangements with machinery manufacturers and suppliers.

The company has protected the value of SFP on around half of the farms it manages and advises upon. This has been done by entering a forward contract to sell euros and buy an equal and opposite contract in Sterling at a fixed date. The decision as to whether this is done rests with the owner, whose SFP will be paid in sterling.

“Farmers’ normal banking sources were crazily slow to come up with initiatives for hedging the value of SFP, especially considering they have been encouraging farmers to take risk out of their businesses,” says Mr Williamson.

“Some growers see fixing the rate of sterling to Euros to protect the value of their SFP as speculation but it is exactly the opposite – it is reducing the risk to the business, not increasing it.”

Mr Williamson acknowledges that some of the tools which Velcourt uses are more accessible to the firm because of its size, but maintains that there are affordable methods for all farm businesses to manage risk to some degree.

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