Use forward contracts to reduce feed price risks

Regardless of the volumes being bought, using forward contracts to reduce the risks associated with changing feed supply and feed price makes sound business sense.

It doesn’t matter whether you’re taking delivery of an arctic load of soyabean meal every month or simply need 20t of sugar beet feed to use as a midday supplement during the winter, buying on forward contract when the price is right can substantially reduce feed costs, explains KW feed specialist Chris Davidson.

“And, just as importantly, it’s sometimes the only way to guarantee supply. With limited supply of many moist feeds this past winter, for example, that guarantee of supply has become the main priority for many larger units.

“As long as the price is reasonable, they’ll book well in advance to ensure they get the feeds they need to maintain consistent rations. And that consistency is worth more than any minor price saving.”

Price volatility

Booking feeds in advance – at a known price and for delivery at specific times – is also the best way to guard against the risk of unforeseen price rises. According to Mr Davidson, it’s something that needs to be taken very seriously this year, with poor weather affecting crops in Europe and South America, continuing uncertainty surrounding Chinese demand, and the ongoing debt crisis in Europe.

“All are creating considerable volatility in the feed commodity markets, and that’s making it very difficult to predict where prices will go,” he adds.

The graphs below show how soyabean meal forward contract prices (green lines) for summer (May-Oct) and winter (Nov-Apr) varied compared to the spot price (red lines) during the past couple of years.

True, the European debt crisis brought about an unexpected drop in prices just before Christmas, but in the previous three seasons it’s clear to see that buying forward up to nine months or more ahead could have produced some substantial savings – close to £100/t if January 2011 soyabean meal had been bought forward in March of the previous year, for example.

Graph key:* Ex-port prices, figures for start and middle of each month only used to show general trends.

“Don’t expect to get it right every time, but on average over a number of years the savings will add up,” says Mr Davidson.

The bar chart below shows the example of one KW customer from the Midlands who saved an average of 32% across 357t of feed purchased for the 2010-11 winter by buying forward, cutting feed costs by £20,463, or £57.32/t. And even in the difficult markets this year, another customer still saved an average of £3.10/t across nearly 1,500t of feed, reducing his winter feed bill by £4,467.

“Look at the feeds you’ll need for the summer, or even next winter, as a ‘basket’ of products, and focus on those which are best value at any given time. Soya hulls are a good buy at the moment right through to the end of the summer, and definitely worth considering, while the recent rise in soyabean meal prices highlights the risks of waiting too long before booking ahead.”

Dips in the market

Mr Davidson’s advice is to look for dips in the market that represent good opportunities to buy, booking perhaps 10-20% of requirements at any one time to spread the risk. The exception is when availability could be a problem, or prices are clearly as low as can be expected, in which case getting 100% booked in advance is often the right move.

“Most of the focus at the moment is on summer contracts for delivery between May and October (at time of writing), but if the prices come right we’ll see some customers booking as much as 18-20 months ahead,” Mr Davidson continues. “That’s a lot further forward than most farmers would be thinking.

“Close contact with a feed supplier that you trust to have good market information is critical, and remember that the risks of trying to hit the absolute bottom of the market are far too high. Have a clear idea of what you can afford to pay for each feed, based on realistic estimates and a good budget, then monitor feed prices at least weekly to work out both the trends and the likely limits.

“An overall position paying £10-20/t more on average than the absolute ‘perfect minimum’ is far better than being caught out by a £50-60/t rise in the market. With milk prices already higher than last year, don’t risk good margin by chasing one that might be only slightly better.”