Volatility looks set to remain a significant challenge for growers for the foreseeable future as macro-economic events, as well as more traditional market fundamentals, continue to influence prices.
Although some stability has returned to grain markets in recent weeks, whether this is enough to arrest or even reverse the long-term decline seen since the early spring remains unclear, says Andersons’ George Cook.
“Old crop wheat prices settled at around £140/t ex-farm at the time of writing due to increased demand from compounders and rising hopes of a eurozone rescue package. But any prolonged upturn looks remote for now, with little or no carry through to the end of the season. Southern hemisphere crops look set to deliver on quantity at least, and quality fears look set to ease as weather in Australia improves.”
The new crop market also reflects that sentiment, with November 2012 values dipping below the psychologically important £140/t value at the start of December, he adds.
Oilseed and pulse values have held up better – although well below contract highs they are at least on a par with year-ago levels, trading at around £340/t and £170/t respectively in early December.
Rising crude oil prices and a potential eurozone rescue package are bullish to oilseed values, though buyers are needed to maintain momentum. New crop values are also stable at €20/t below old crop, but this level could be vulnerable to continuing eurozone problems and poor economic data from the US and China, Mr Cook notes.
The significant swings in the prices of harvested crops and inputs seen over the last few seasons are likely to continue, says Andersons’ Sebastian Graff-Baker. “The factors behind price volatility are largely beyond the control of producers, so they need to appreciate factors that are within their control and exploit them to the full.”
Producers should budget, and then use those budgets to consider how to manage volatility. This will provide the opportunity to formulate an orderly structure to selling and buying, he adds.
For many growers, new crop grain prices are trending down below their cost of production. A typical figure, including cost of working capital, a provision for the proprietor’s cost of labour and management and a rental equivalent figure now ranges from £150-190/t for an 8-9t/ha crop, says Mr Graff-Baker. And there are strong indications that many cereal growers are adding to these costs, rather than reducing them.
“Higher output prices seen in the last few years have prompted much investment in new machinery and equipment. We may well see some of the mistakes of the mid-1990s being repeated as inflated overhead costs lock producers into high costs of production for some years.
“Returns from cereals cropping with tender FBT rents at over £200/acre are highly questionable and in many cases non-existent.”
Producers should examine closely opportunities to collaborate to reduce costs. This can also make better use of skilled operators and equipment with state of the art technology, for precision and timeliness of work.
Cost of production analysis allows producers to lock in sales when prices are above production costs, so securing a profit.
“Considered grain marketing can help minimise the risks from volatility. Ideally the same risk-management approaches ought to be available to cover inputs. It would be helpful to the combinable cropping sector if innovative purchasing arrangements could be developed.”
• Price volatility remains key challenge
• Cost of production knowledge vital, but rising in many cases
• Structured selling plan is key
* Commentary for this article is based on Andersons’ Outlook 2012. Copies can be obtained free of charge by calling 01664 503200 or it can be downloaded from the Andersons website – see ‘Publications’.
* The Andersons Centre will be running its popular series of spring seminars on the prospects for UK agriculture in more depth at locations around the UK in spring 2012. These briefings are aimed at farm business managers as well as professionals working with companies in the agricultural sector. Detailed overviews of each of the main sectors of UK agriculture will be covered as well as comprehensive discussion of the latest agricultural policy developments. For details go to the Andersons Centre.