Business Clinic: Should I sell grain forward for November 2018 and 2019?

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, James McFarlane of Savills advises on grain marketing plans.

Q. My grain merchant has offered a November 2018 price of £160/t and a November 2019 price of £157/t for my feed wheat. Should I lock into these prices now, or will the price continue to improve?

A. It is impossible to say whether the price of cereals will continue its recent rise, but I would suggest that if you have not yet planned any 2018 crop sales, you are leaving it late.

Simple economics means that any business needs to sell its output at a higher price than it has cost to produce. If you know that £160/t is higher than your cost of production, then it would be sensible to lock into selling some of your crop at this price.

See also: Business Clinic – share-farming v contract farming

Hopefully you have a schedule to hand of your crop area and anticipated harvest total, taking into account your average yield over the past five years. From this you can decide a strategy of when to sell your crop.

This will also depend on storage capacity and cashflow requirements. For instance, you may have commitments to meet such as rent or fertiliser purchases to which you need to match crop income.

You may then decide to sell a proportion at harvest, a further quantity for November movement (as offered) and the balance in, say, February.

If, for instance, you anticipate a harvest of 1,200t, you might plan that one-third (400t) is sold for harvest, one-third for November and the balance the following year.

From this a strategy for selling each block can be agreed – so perhaps three units, or consignments of 116t (four loads). In this way you could accept the offer price of £160/t for part of the harvest.

There is of course the ability to secure against the price falling through the use of grain futures. This is a hedging mechanism. In this way you can agree to sell the crop to the merchant at a price to be determined at the time.

Without hedging, you are open to the risk of market price changes. By taking out the futures contract, you are locking into the quoted futures contract price at the time of the agreement.

There is a cost to taking out the hedge, so this has to be taken into account to identify the net price achievable.

There may be a greater advantage to you taking out a futures contract for the 2019 harvest. We will have left the EU by then and be midway through the proposed transition period.

We do not know how the negotiations will proceed and therefore have no idea of the relative value of sterling, which is a key factor in grain prices.

In addition, fertiliser prices are some 20-25% higher than at this time last year and fuel prices have also risen; it is likely that seed and agrochemical prices will also rise. Therefore the cost of growing the crop is likely to be more than the cost of the current crop. Based on this, can you take the risk of grain prices falling?

Every business needs to identify its own costs of production, but locking into a November 2019 price should ensure there is a positive margin.

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Futures markets and commodity risk management online course:

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  • Negotiate better prices with your grain merchants

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