Farmers have been warned to take care over how much wheat they commit to long-term biofuel contracts.

With grain markets set to become more volatile, farmers should avoid any negative price impacts by not signing conditional contracts, grain traders said.

“All of these contracts are conditional on an ethanol contract being built sometime in the future,” Gleadell trader Jonathan Lane said.

“Farmers who sign up to these contracts are giving potential ethanol plant suppliers a free option, with no security as to whether the prices within the contract can be relied on in the future.”

“Farmers should be aware of the difference between a conditional ‘piece of paper’ and contracts that are worthwhile, long term and can be relied upon to give farmers security in what will be a volatile future,” he said.

Simon Tubbs, Framlingham Farmers’ marketing manager, agreed that farmers should sign long or short-term contracts with grain traders rather than signing future crops away to bio-ethanol producers.

“While additional forward selling opportunities are always useful, grain prices have increased steadily since last summer so producers should keep a close eye on the market.”

“Wheat futures for May 2009 are currently trading at about £94.75, suggesting over £90/t ex-farm, whereas the implied ethanol contract price is below that figure,” he said.

“Committing to sell grain beyond 2009 would therefore seem rather premature.”

Mr Tubbs said markets were certain to become more volatile, and farmers should try to reduce the potential negative impacts of price volatility by joining marketing pools.

“Because these can operate in both the food and fuel markets they allow members to enjoy all the benefits of above-average returns, within a balanced marketing strategy,” he added.