THE LEGACY of disastrous experiments with forward contracts in 2007, combined with the memory of recent tough seasons has meant many wheat producers in Australia are fully exposed to the current drop in grain prices.
Andrew Weidemann, chairman of Grain Producers Australia (GPA) said the majority of Australia’s wheat producers preferred to risk manage their crop post-harvest, meaning little grain has been locked in at the higher values that peaked in early June through either forward contracts or derivatives.
“We’ve had some good results with storing grain in the past, but we are exposed when there are pricing issues pre-harvest,” he said.
“Farmers prefer post-harvest marketing to either straight forward physical contracts or derivatives, which in general they don’t feel comfortable using.”
“People will lock in grain contracts, but not until later in the season when they are more comfortable about crop prospects.”
Mr Weidemann said the reluctance to participate on the forward market could be dated back to 2007 when many farmers down the east coast in particular were slugged with massive contract wash out fees.
“The season shaped up well early on, before declining sharply, meaning prices rose equally sharply. Farmers who realised they would not have the grain to meet contracts were forced to wash out their contracts at much higher values than the original price,” he said.
Further to the reluctance to use forward marketing tools this early in the year, Mr Weidemann said for farmers in southern Australia in particular, the memories of the last two tough seasons were front and centre.
“People are not necessarily that confident at present, in spite of the good start.”
He said this phenomenon had an added sting in the tail in that drought impacted farmers would not be able to wait out the cycle of low prices due to a need for cash flow.
“There will be a lot of grain stored on-farm, but farmers will need to generate cash flow and that will mean sales at prices lower than people are comfortable with.”
“I am hoping banks and lenders will be able to assist through offering loans that allow grower the cash flow to not be forced into sales.”
Phil O’Callaghan, managing director of agricultural consultants ORM, said risk management tools such as on-farm storage and bank loans to allow farmers cash flow while looking for a rise in grain prices would be important this season.
“There are a core of farmers out there who are comfortable using derivatives and forward marketing products, but there are a lot who are not,” he said.
He agreed with Mr Weidemann that the fall out of 2007 and unpredictable spring rainfall had seen less farmers forward marketing grain.
“The impact of the wash outs, combined with a lack of certainty around production has seen people drop off from using forward marketing products.”
Mr O’Callaghan added that the way the marketing years had panned out of late had meant farmers storing physical grain and marketing it the following year had been a sound strategy, particularly for those with access to the domestic market.
“It means many farmers now like to use this method for managing pricing risk, but it can come under fire when prices fall early in our growing season, like the situation we have currently.”
Mr Weidemann said the price collapse in the past month was disappointing for Australia’s grain producers who are finally on the cusp of a generalised good season, with virtually all major production zones having excellent yield potential at present.
He said farmers would look to minimise storage costs.
“I think where possible farmers will look to store grain on-farm in existing storage or perhaps in grain bags, rather than paying costs in the bulk handling system.”
Mr O’Callaghan said farmers would also have to monitor quality spreads.
“There is some noise about concerns with crop quality in France, and if a decent spread for high protein wheat opens up, farmers may look at applying late season nitrogen in a bid to get protein levels up to get access to higher prices for high protein lines.”