Time to reconsider grain marketing strategies?
Farmers are still reeling from this year’s disastrous harvest – but with grain prices close to record highs, is it time to reconsider marketing strategies? Olivia Cooper reports
This year’s harvest was the most difficult in living memory for most growers, with poor yields and volatile prices complicating marketing decisions. Drilling conditions for the 2013 crop have been far from perfect too, leaving many uncertain about the best selling strategy for the year ahead.
“The big problem with the 2012 harvest was that yields were incredibly low, resulting in a higher proportion of the crop being sold forward than farmers had expected,” says Jack Watts, senior analyst at HGCA.
Wheat yields averaged just 6.7t/ha – the lowest since 1988. So although the wheat area was the greatest since 2008, at 1.99m ha, total production fell by 13% year-on-year, to 13.3m tonnes.
Forward prices looked very attractive last year, at about £140-£150/t, so many farmers sold a proportion of the crop forward. But the drop in yields meant some growers were unable to fill their contracts.
However, prices have since risen by £60/t, to more than £200/t, offering a decent margin for most with crops left to sell.
It is not clear how much wheat growers have left to sell, but supplies could be tight towards the end of the season, with an historically low exportable surplus of just 750,000t.
By the end of September, the UK had exported 289,000t, but imports had more than doubled year-on-year, to 567,000t, making the UK a net wheat importer for the first time since 2001. In addition, Ensus is now importing maize, displacing use of domestic grain.
“The more we import, the more stocks will be available,” says Mr Watts. “There is therefore a lot of uncertainty about what end-season stocks will be.” Global maize stocks are also at an historic low, which has driven prices up to record highs this year. “That is having a knock-on impact on wheat values. But those high prices will ration demand, and we are expecting the first annual decline in demand in 17 years.”
For the remainder of this season, all eyes will be on the southern hemisphere harvest, with adverse weather affecting maize plantings in Argentina and Brazil. “Both countries need near-perfect weather conditions from now to harvest.” Drought in Australia has also slashed its wheat production by 30%, limiting exportable supplies.
Closer to home, crops sown into poor conditions already face a yield penalty. “The big driver is going to be the weather over the next four to six weeks – if it’s relatively dry, farmers may continue to plant into the new year,” says Mr Watts. “The incentive is there, because at about £180/t new-crop prices are the highest ever seen in the pre-harvest position.”
High prices will encourage a sharp increase in plantings elsewhere around the globe, says Leo von Kameke, UK analyst at ODA. “However, in the US, winter wheat conditions are the worst on record, with just 34% of the crop rated good to excellent, down from 50% at the same time last year. In a year when we really need good production, there are a lot of uncertainties.”
Outlook for 2013
0ilseed rape and soya
Wet seedbeds and high slug burdens mean the UK’s 2013 rapeseed crop is not looking promising, with the total area likely to be below 2012’s record acreage. Planting conditions in South America are also difficult, but Brazil is likely to overtake the USA as the biggest soya producer next year, says Jack Watts, senior analyst at HGCA.
“China is the big driver in terms of demand, taking a quarter of the world’s soya supplies. It’s much more difficult to ration demand through price as there’s no real alternative to soyameal in the animal feed market, so the price is going to be at the mercy of the weather over the next nine to 12 months.”
Barley
Old crop supplies are likely to be finely balanced, aided by strong malting and feed demand. But new crop production will depend on the weather – if farmers can’t drill winter wheat, the area of spring barley, oats and beans is likely to rise sharply, says GrainCo’s Gary Bright. “Spring malting contracts look attractive, at close to £200/t, subject to quality, compared with about £135/t this time last year. It’s worth getting a contract for the other crops, even if you only link the price to wheat to fix at a later date – that way you can hedge against the futures market.”
Marketing strategy
Predicting future prices in such a volatile environment is close to impossible. So what is the best marketing strategy for the year ahead?
After selling a far greater proportion of grain forward than planned for the 2012 harvest, farmers have understandably kept away from the market in recent months. “Ironically, those who didn’t have a set marketing strategy, and just held onto their grain until after harvest, will be in the best position this year,” says Richard Jenner, director of marketing at Openfield.
Anyone with grain left to sell could take advantage of what should be a relatively stable period between now and February/March. “For the time being, the market should be reasonably well supported, before we get any more news on the southern hemisphere harvest. If you have good-quality wheat, it will find a home – but if it’s low bushel weight stuff it will be more challenging to place, so could be worth tackling sooner rather than later.”
At current prices, the only thing preventing more wheat from being imported is the lack of storage at ports, adds Gary Bright, managing director of GrainCo. “Unless the whole global complex market goes up further, it’s hard to see the UK market rising much more.”
In northern England and Scotland, farmers have sold about 85% of the 2012 crop, and very little new crop, he adds. “So many farmers have said to me that they’re never going to sell forward again, but at £185/t for November, selling 10-15% would be extremely prudent. You don’t have to commit a large tonnage – sell little and often to track the market.”
Global wheat and maize production could bounce back next year, and even in the UK a return to normal yields should result in an exportable surplus, so prices could go either way. “Every single season is different, so knee-jerk reactions to the previous season can be very dangerous,” says Mr Watts. “Marketing decisions should be based around the needs of the business, rather than trying to second guess what the price is going to do.”
Cash flow is a critical consideration, and some merchants offer advance payment against sales, says Nick Tapp, head of agribusiness consultancy at Bidwells. Timing of crop movements is also important, both from a store management perspective and shifting of profits from one year to the next, to minimise tax bills.
“Some farmers choose to opt out of responsibility for marketing and put their crops into merchants’ pools or tracker funds. There are also more and more buy-back contracts and minimum-priced contracts available – increasingly sophisticated tools to allow farmers to share in the upside of a market after making the selling decision.”
Although options have become extremely expensive, they do provide a valuable way to lock into a price and still benefit from a rising market, says Mr Tapp. “People who sold at £140/t last spring now probably wish they had bought an option – and I think we’ll see more use of options this year as a result.”
At current prices, almost everyone should be able to make a profit, so it would be sensible to sell 30-40% of what’s already in the ground, he suggests. “You probably don’t want to be more than 75% sold by harvest, so keep an eye on things over the next few months.”
Another alternative is to use futures to hedge as part of an integrated marketing strategy, says Mr von Kameke. “ODA members are fully protected for the old crop campaign, but remain 50% open to the market using a combination of physical sales, sales on the futures market and options.
“For the new campaign, ODA members have an adequate level of protection, while remaining open to most of the market, thus locking in current high prices, but remaining exposed to further market increases.”
Grain market background
- UK 2012 wheat yield averaged 6.7t/ha – lowest since 1988. Total production fell by 13% year-on-year, to 13.3m tonnes
- Wheat supply could be tight at end of season, but more difficult than ever to assess because of quality issues
- UK is a net wheat importer for first time since 2001 – by end of September, we had exported 289,000t and imported 567,000t
- Ensus importing maize, displacing up to 30% of domestic grain it expected to use
- Global maize stocks at an historic low, but high prices will ration demand
- Southern hemisphere harvest needs watching – weather affecting maize plantings in Argentina and Brazil, while Australian drought will severely limit its wheat exports
- Recently sown US wheat crops rated very poorly
- UK new crop harvest prices highest ever seen pre-harvest
- Firm outlook for oilseeds, driven by huge demand from China and poor start for many EU crops
- Strong demand for limited old crop barley – new crop outlook depends on wheat drilling progress
Marketing pointers
- Market should be relatively stable between now and February/March, but low bushel weight samples are challenging to place
- Consider tax and business needs such as cash flow in timing of sales
- Very low proportion of 2013 crop sold following experience of 2012
- Current 2013 crop prices offer most growers a profit
- Increasing range of buy-back and minimum-price contracts on offer
- Volatility likely to increase use of options
- Cash advances are offered by some buyers