Plan and spread the risk

2 January 1998

Plan and spread the risk

Cereal growers need to

adopt a "risk averse"

strategy to marketing their

grain to secure their

finances. Mike Adams

considers the options

AS GOVERNMENT support for cereal production is slowly, but surely removed, growers are having to focus increasingly on marketing to obtain the best financial return.

It is, therefore, essential that they plan ahead, making preparations to move as much grain as possible at the most advantageous time and price.

In the past, it has been reasonable to expect values to increase after harvest. Currency fluctuations were taken care of by Monetary Compensatory Amounts (MCAs), while intervention was available for all the main cereals of the prescribed standard.

But things have changed. MCAs are a thing of the past. And while government resists claiming compensation money from Brussels for green £ revaluations, farmers are left wide open to the effects of currency.

Furthermore, intervention now only applies to barley and quality wheat, forcing farmers to battle for sales of feed wheat on EU and world markets. And on top of these changes, Agenda 2000 threatens to reduce market support measures further.

Against this background, even good farmers could face losses if they dont market their produce well. The threat of not maximising yield will always exist, but now failure to secure a sufficient price is an increasing business concern.

This year in particular has seen great changes in the value of cereals, hitting lows not envisaged by farmers in recent decades (but always forecast to arrive under the MacSharry reforms of 1992).

A global grain market is getting closer, while state involvement is getting less. Governments no longer wish to store grain, which leaves more of it in the hands of producers for much longer periods. This can lead to potentially large price fluctuations and an increasingly volatile market.

In order to ensure the risks are minimised, farmers must understand which factors drive the market, and which do not.

Planting plans should reflect the relative demand for different types and grades of grain. Those producing only feed wheat face the wildly competitive and currently oversupplied market for feed ingredients.

By growing a proportion of biscuit wheat, some group two milling wheat and the remainder group one, farmers are able to spread the risk across several grades and so increase the available marketing windows.

Yes, they should consider local soil type and conditions, as well as looking at crop performance under normal harvest conditions. But there are other elements that affect cropping plans, including the requirements of local mills, bin separation opportunities and the nearest export silos.

With these factors in mind, farmers should be able to assess the optimum levels of production in accordance with demand both nearby and further afield.

As such, the marketing plan should already be in place by harvest. It should encompass separation of lots in store, sampling on intake, with great care taken to ensure the crops are accurately tested and carefully stored.

The maintenance of grain quality is essential. Loss of quality due to lack of regular moisture and temperature checks often leads to substantial financial loss in terms of premium and haulage costs to alternative buyers. It is notable that the leading arable farmers in the UK already have store management as a top priority. Growing demand for food safety assurances will heighten the need for this.

Price is a difficult issue. What is an acceptable rate? Often when markets fluctuate, sellers miss a good price through holding out for an exceptional one.

To avoid the dangers of making a loss by retaining grain and losing quality, farmers need to know their costs precisely. They will then be aware of a realistic value for their crops and can accurately forecast profit after costs. This helps growers to make quick decisions in a fluctuating market.

Watching the market

Keeping abreast of currency movements is also crucial. By watching the trends, farmers can follow the rapid price changes and learn to react when it is appropriate. Do not make snap decisions or alter the selling strategy unless you understand the factors which have caused the market to move.

It is also dangerous to be an "all or nothing" seller. When prices reach a level at which you are prepared to sell, it is usually wise to start selling – but in small lots, again spreading the risk. You can always increase the momentum if the need arises, or if the strategy proves correct.

It is important to devote time to marketing and to establish the information you need to make the right decisions. Once you have the relevant information, a marketing and risk management strategy can be identified.

Key points in such a plan are as follows:

&#8226 Avoid having to sell during the harvest period. If you cant, either concentrate on a specific product with strong demand, or try to sell forward pre-harvest on profitable terms. Remember, though, that the buyer defines the quality so that part of the risk remains with you – this is the trade-off for him taking the price risk.

&#8226 Watch the forward market even after harvest. Growers often look at spot prices and decide against selling at all. But a sale for future delivery might offer a sufficient extra margin to justify the deal, whereas waiting for the spot price to come right might prove disastrous if it never does.

&#8226 Consider price option protection. This means selling forward, but paying something out of the forward price as an insurance against a rise in the market which you would otherwise miss out on altogether. Your merchant or co-op can advise you on this.

&#8226 Take a look at hedging on the futures market. Using a private broker account allows you to sell contracts on the London futures market and so guard against a major shift in prices when you actually move your grain.

&#8226 Try grain pooling. Commitment of part of your crop to a grain marketing pool will give you a comparison with your own marketing achievements and ensure that market fluctuations during a season are spread over a much greater tonnage – smoothing out both highs and lows for each pool member. Pooling also allows the pool manager a stronger negotiating hand, with a known tonnage of analysed product he can offer to major customers. He then takes responsibility for resolving problems at intake. You get the benefit from no longer being a minnow seller among big fish buyers.

At every stage of the planning and marketing process, help and advice on how to reduce risk are available from responsible merchants and co-operatives. With market volatility on the increase, there has never been a stronger case for producers to use their partners in the trade to cut their personal risk and ensure a fair return for their labours.

&#8226 Mike Adams is the current president ofmerchant body, UKASTA.

Harvesting the crop is only half the battle – marketing it is just as big a challenge. A plan should already be in place before the combine rolls.

Mike Adams, UKASTA president points the way to a marketing plan.

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