Budget to win best returns
Budget to win best returns
Maximising crop profits in
increasingly volatile grain
markets is no easy matter.
It requires a fundamental
rethink of the farms grain
marketing strategy. Here,
Amanda Dunn talks to one
grower who has made the
switch and relays some
timely tips from the Home-
Grown Cereals Authority
WHEN Cambs farmer Alan Measures took over the marketing of 5000t of farm grain from his brother five years ago, he had next to no previous experience of the demands of the job.
"At the time I did not have a plan, I didnt have regular contact with merchants and I wasnt really sure what I was doing," he says.
Today, formal plans and strong merchant relationships are the backbone of the farms grain marketing. Several methods of hedging are used for protection, a variety of information sources are used to keep abreast of market developments and plans include the introduction of futures into the marketing strategy.
Variety selection
"Our marketing starts with variety selection," says Mr measures. Throughout harvest there are ongoing discussions with brother Ben, who is responsible for all arable work, and our agronomist. They know which varieties perform well and I know which ones I can sell.
"We are growing Consort and Riband, with Claire as a Riband replacement. They suit our soil type and there is good local demand for soft wheats. Our main quality variety is Soissons, with smaller areas of Charger on trial, Hereward and some Weston.
"Selling starts once the crops are in the ground," says Mr Measures. "A proportion is allocated to pools, 24% for harvest 2000, and preliminary storage and movement plans made. Our financial budgets provide a benchmark price/t. At harvest most grain is weighed into store, samples drawn and forwarded to merchants with whom we have established relationships.
"We used to leave all sampling to merchants, some would sample thoroughly and others less so, which resulted in enormously variable results. We now spear the heaps ourselves and split the samples for cross-checking of analysis."
Merchant schedule
Shortly after harvest a schedule is forwarded to all merchants detailing variety, tonnages, storage location and planned movement. "I like to tell the merchants what I have got and when I plan to move it. A lot of it is about time management. I dont have time to constantly ring merchants and if they know the situation it helps them too.
"Movement is dictated by storage because some sheds need to be emptied by Christmas to permit machinery maintenance. This results in a spread of movement and cashflow. Target prices reflect variety, quality and month of movement and are always in mind when grain is offered for sale."
Harvest 2000 wheat was budgeted at £69/t, but a current average of over £76/t before pools results means Mr Measures is comfortably above budget.
Pools and forward trading are used to spread risk, and options are used when feasible. "The most difficult thing to judge is when to sell grain. By going through a pool Im delegating that decision to someone who is closer to the market.
"When prospects for prices appear more volatile we use options to fix a price at a level we know we can afford. They can be expensive, but more affordable if you go further out of the money. We decided against options in 2000, but are using them for the coming season."
Selling forward is another form of hedging. "We needed to move our Weston wheat this year before Christmas, prices in September for November movement were £65/t, higher than my budget, so we sold forward," says Mr Measures, who rarely sells spot.
"Developing relationships with merchants has been one of the biggest influences in the marketing strategy," he says. "When I first marketed the grain someone would ring and say todays price is £X I think its a sell. They would want an instant decision and I found I was unprepared. Now, I leave merchants with my target price in the hope theyll come back to me when they can match it.
"By doing this and monitoring grain markets and currency markets, I hope to catch short-term rallies."
But Mr Measures does not just speak to merchants. "I like to get an independent view on things as well, so I speak to HGCA representative several times a year. I also use their web-site for daily market reports.
Buoyant period
"I was fortunate to start grain marketing during a period when agriculture was relatively buoyant. The risks for getting it wrong now are much greater. In the future I hope to use futures trading and plan to try the Reuters market information service available on the web.
"This should give us more opportunity to take a position in the market without compromising chances of maximising quality premiums." *
Taking a budgeted position in the market, while being able to exploit quality premiums, is the goal for Cambs farmers Alan Measures. Reliable market information is vital to get the best returns.
CROPMARKETING
• Pools.
• Options.
• Forward trading.
• Strong merchant relationships.
• Independent views via HGCA.
HGCAADVICE
Develop a marketing plan Start with farm budget, cash flow requirements and production costs/tonne of grain.
Stick to your plan Avoid selling spot to meet cashflow demands.
Protect yourself Consider options or minimum price contracts.
Follow the markets Exploit short rallies.
Maximise storage revenue Sell grain forward when market carry exceeds storage costs, thereby locking in monthly rental income.