Short-term moves

9 October 1998

How are you going

to sell your grain in 98?

Do low grain prices and

volatile markets mean

farmers should leave selling

to the experts? Or can they

still get better final prices

themselves? Tim Isaac

of Strutt & Parker examines

the issues

SINCE prices began to fall in summer 1996 farmers have been bombarded by grain marketing initiatives to reduce risk and avoid market troughs.

But given that no one can accurately predict the future, why should farmers pay someone else to guess? They can do that for themselves and for free.

Admittedly, grain merchants are in daily contact with domestic and international markets, so have more information to make a more educated judgement. But their services carry costs, which may not be covered by any small improvement in price.

If a farmer has the time to keep in regular contact with the market, he may be better placed to market his grain for the best overall price in an environment with so many unknowns. However much information you have, you can still be wrong – so why not be wrong for free?

One thing is certain – grain marketing is going to become increasingly important to the viability of farming businesses and much more time consuming as a result. Now is the time to decide whether to give your grain to someone else to market or to market it yourself.

Careful consideration of the strengths and weaknesses of the main marketing alternatives should help your decision.

Minimum & fixed price contracts

THIS is another method of stabilising returns. Such contracts are plentiful and offer another form of safety net by fixing in a known return. The only pitfalls are a close inspection of the terms of contract and trying to avoid the temptation of fixing a premium or fixed price too early.

The 1997/98 marketing year shows why. In most years it has proven to be sensible to fix in a £20/t premium on milling wheat if it is offered. As the base feed price increases through the season, but milling premiums fall, the producer of top-quality wheat can maximise returns without foregoing flexibility.

Such premiums were available just after harvest 1997. But if they were fixed and the feed base was not, farmers saw the value of their contracted milling wheat fall well below the open market value, which soared in the late spring of this year. A fixed premium price of £93/t compared with an open-market price of £116/t was common.

Fixed price/premium contracts are useful in an overall marketing strategy. But remember that when the fixing is done, an opinion is being made about future market trends. This should reflect well founded expectations, not just premiums that seem attractive at the time.

Marketing pools

POOLS place a lower limit on the price the farmer receives and allow him to benefit from marketing larger parcels of grain. This reduces the risk and time involved in marketing and helps to stabilise price fluctuations.

However, there is a cost. For example, one merchant charged 4.25% commission last year on a minimum price of £92/t. Farmers were required to commit an agreed tonnage to the pool in autumn 1996 for marketing from harvest 1997 until July 1998.

On average, the price of wheat fell throughout this period and many were grateful of the safety net. Net price received on this pool was £88/t, the minimum price minus the commission.

This represents little or no advantage to a farmer who sold his own wheat well over the same period, but who was free to sell and move his grain to whom and where he liked.

Pool marketing only really offers worthwhile advantages to the smaller and/or busier farmer who is unable to spend much time selling parcels of grain which are too small to be particularly attractive to a merchant.


SELLING a parcel of grain and then taking out an option on that sale can be done in two ways; through a merchant, or direct with a City-based commodity broker.

The former is fairly straightforward and the grain is sold in the normal way – say 100t at £75/t in September, with movement in February and money received in March. A £5/t option allows the farmer between the time of the sale and usually the middle of the month preceding the chosen movement month, to follow the market and "lock-in" a higher price if the market rises, say to £85/t. In this instance, the farmer has made a profit of £5/t over the market price at the time of the sale (£85/t – £5/t option cost = £80/t).

The downside is limited to £70/t, a loss of £5/t, i.e. the cost of the option if the price falls between the time of sale and the time of "lock-in". The farmer is effectively insuring against downward price movements whilst retaining the option to monopolise on any upward price movement. There is obviously an element of risk and the farmer has to be in regular contact with the market and preferably have a good relationship with the chosen merchant. The cost of the option is deducted when the final sale proceeds are sent to the farmer.

Dealing directly with a City commodity broker requires even greater understanding of world markets, their trends and the terminology. An example of a deal recently agreed involved selling 200t of feed wheat in the middle of July for movement in November 1998, priced at £73/t to a regularly used merchant. Two 100t call options were then bought back-to-back, but completely separate, with the physical sale at an option cost of £4/t based on a May 1999 strike price of £81/t. The cost of the option, 200t x £4, is payable on the day the options are bought (in contrast to an option with a merchant) and it is entirely up to the farmer to monitor the futures market.

If the May futures price ever reaches a level of more than £85/t, £81/t plus the £4/t option, the farmer is making a profit. Between £81/t and £85/t, he is losing some of the cost of the option, but below £81/t he is losing the entire cost of the option. But, most importantly, this is all he loses. He does not lose anymore than £4/t if the May futures price does nothing but fall from the day the option is bought to the middle of the month preceding the strike month, which is when the deal will automatically "lock-in" if it has not been manually "locked-in" before. An option effectively gives the farmer the right to be wrong.

These options are usually cheaper, including the small percentage commission, than those done with a merchant, but are more complicated and inherently more risky. This implies the possibility of both greater or poorer returns. Again, one may be making dangerous assumptions about the market.

Selling spot and forward

BY far the simplest and cheapest, this flexible approach allows quick responses to be made to cashflow and storage requirements. The disadvantage is the lack of security and stability, especially in a falling market.

There are certain dos and donts which should be borne in mind when adopting this strategy (some are also applicable to the other marketing methods):-

&#8226 Dont market hundreds of tonnes on the basis of a single sample.

&#8226 Dont market by committee as they are not responsive enough and decisions need to be made quickly.

&#8226 Do consider storage and cashflow practicalities.

&#8226 Do keep up to date by identifying the best Market Report and keeping in regular contact with the merchants to find out what the market wants and when.

&#8226 Do be market wise – know what the various market terms and indicators actually mean, especially with regard to the world markets.

&#8226 Do construct a farm budget using price levels which bring viable returns. If the price reaches this level, sell a reasonable tonnage of your harvest.

&#8226 Dont set unachievable targets.

&#8226 Do sell little and often and try to aim for the premium markets. When you sell is often more important than the price level you sell at, so it is important to keep an eye on the market.

Short-term moves

DO use a mix of selling methods which are under constant review.

This final point is perhaps the most important. Using a number of different marketing strategies helps to spread the risk by reducing exposure to problems experienced in any one market at any one time. Someone who uses all of the methods discussed above, each representing say 15% of his total harvest, cannot be criticised and will overall enjoy consistent returns in a volatile environment.

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