Understanding crop risk management

24 Aug, 2014 02:00 AM
Comments
29
 
No matter how you forward sell your commodities, you must track yield weekly

WHILE technology means farmers can have pricing information at their fingertips in real time, the key to successfully marketing your crop remains not in the information itself, but in understanding basic risk management and knowing your cost of production.

That’s the message from National Australia Bank’s head of agribusiness markets Greg Noonan.

He said volatility in grain prices over the course of every season can provide opportunities for growers to catch the peaks – but only if they do the preparation and are ready to act when prices move.

Mr Noonan said the first step was in knowing your true cost of production per hectare, including finance, followed by establishing a margin above this that represents a sufficient return to account for the risks associated with forward selling.

“No matter how you forward sell your commodities, you must track yield weekly and ensure you never hedge more that you physically have in the paddock. In most dryland cases the rule of thumb is to hedge less than 50 per cent and manage it under that level.

“Every grower will have different yields, cost variability and equity levels in land and machinery and all these factors will impact risk appetite and where an individual grower can comfortably manage their price risk in the forward market.

“Orders that are ‘Good Until Cancelled’ are utilised by many growers. They sit there until the price reaches the level you want, and then get automatically filled.

“That saves you missing the boat if it’s a short term rally and you have to run around trying to get an order on to sell before the price drops again. Clients who were fortunate enough to have reasonable seasonal prospects early in the season used Good Until Cancelled orders to take advantage of the stronger prices we saw at and prior to sowing time”

Growers are urged to get professional advice when considering forward selling or other forms of hedging, as there are potential risks as well as rewards.

FarmOnline
Gregor Heard

Gregor Heard

is the national grains writer for Fairfax Agricultural Media
Date: Newest first | Oldest first

READER COMMENTS

Jock Munro
25/08/2014 5:06:32 AM

So Greg Noonan is telling growers to sell a crop whilst it is still in the paddock! Is he aware that growers had the best risk management system in the world through their single desk national pooling arrangement? John Howard,his Liberal colleagues under Brendan Nelson and the Rudd Government put an end to it and they laughed together in the federal parliament as they did it.(See Youtube Liberal Wheat Treachery).
John Hine
25/08/2014 2:33:56 PM

Sorry Jock, single desks are about commodities, we need to be moving into products. There is still a case for farmers working together in cooperatives or marketing groups to be able to afford the right kind of marketing expertise to complement their farming skills.
Jock Munro
26/08/2014 5:37:31 AM

Sorry John, our single desk was about quality and we had the best marketing system in the world-we tailored our crop towards the requirements of our customers -(Crop shaping) and we provided our customers with technical advice. Our key customers are telling us that our quality has declined ,is inconsistent and because of the multi seller system our grain is losing its relative value.
Philip Downie
26/08/2014 11:50:42 AM

Yes we had wheat classes suited to different end products segregated within a port zone we had 19 port zones for APW that were all different but suited to different products that we advised customers about. Plus we were responsive to market changes much more than any other exporter. Now we have a system with no one at the wheel and on auto pilot. We went from Rolls Royce to horse and cart and the horse is lame.
LT
26/08/2014 12:48:36 PM

John Hine, you couldn't be further from the truth about the AWB single desk. It left for dead, the US system, which we now have the worst parts of, where quality control is concerned. Major Buyers have openly stated that since deregulation of the single desk Australian wheat quality control has slipped back to that of the US traders systems. In that system, traders aim to get buyers to take the lowest possible grade allowable giving them greatest scope for their margins. It is a culture of mediocrity which is diametrically opposed the that of the past AWB SD, where quality premiums existed.
Dalby
26/08/2014 1:02:53 PM

While this article looks clever on the surface, it is also very shallow and dangerous. For example, it advises forward selling 50% of a crop from the time it is planted. It talks about having to know your yields.Can the NAB, or anyone, be sure that a crop, prior to being harvested, will yield any milling grade wheat at all? I have seen whole farms of crops in North NSW and Queensland written off within days of harvest, due to bad weather. Forward selling in such cases would guarantee financial disaster. Makes a nonsense of this whole story.
John from Tamworth
26/08/2014 3:00:07 PM

Question to Jock Munro and others.Are you seriously suggesting that the single desk be reconstituted or are you just crying in your beer?
Deregul8
26/08/2014 4:59:26 PM

The basis is telling all the naysayers that WA wheat is worth paying a large premium for. Why? Because of our premium quality wheat. The noodle premium is about to explode again as the market realises the Geraldton zone is going to fall well short of where it needed it to be.
Dalby
28/08/2014 7:18:50 AM

Neither JFT, it is just to expose the lack of credibility in your shallow attempts claiming that leaving our grain marketing and handling in the hands of mega international corporations is the be all and end all for our farmers. If it was, USA and Europe would not need mega billion $ support systems and payments for its growers. Pretty simple proof that claims like yours are wrong.
Philip Downie
28/08/2014 10:41:54 AM

D8 noodle wheat (founded by AWB) is not the WA crop. Mace is also upsetting some of that wheat, making it less suitable.
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