Make the most of a buoyant grain market

GOOD risk management remains vital despite high wheat prices, says one of the region’s top bankers.

Farmers should consider locking into higher values, said Karl Simper, East of England agriculture director for NatWest.

“As sterling weakens, farm profits tend to increase. This is partly driven by the influence the exchange rate has on the level of single farm payment. But currency can also have a less obvious effect on output prices and input costs.

Price volatility was one of the key drivers and there had been some significant movements in recent years. This had perhaps been most extreme in the cereals sector, but there had also been significant price movements within the livestock sector.

“The most significant fluctuations in cereal price were seen in the 2007 and 2008 crop years. Average feed wheat prices, for example, rose from around £90/tonne to £180/tonne and then fell back again to around £100/tonne, where they have remained.”

The sudden rise in price was driven by concerns over supply, in a market where demand was increasing and stocks were low. Two record production years had changed the current outlook. Although world wheat production was forecast to fall by nearly 3% in the coming year, this was still likely to be the third highest level of production on record.

The latest forecasts from the US Department of Agriculture (USDA) suggest world wheat production in 2010/11 will fall back to 661m tonnes. Total consumption is forecast to increase to 663m tonnes (an increase of 12m tonnes compared to the previous year).

Supply and demand is more closely balanced than it has been for the last two years. Closing stocks are forecast to decline in 2011, but only marginally.

“Since 2008, there has been an 18% increase in world wheat stocks, with current stocks at an eight-year high,” said Mr Simper. “This increased level of stocks will act as a buffer against future supply weakness.”

Despite this, forward wheat prices have increased in recent weeks. November 2010 futures have risen from £104/t to over £140/t, with some commentators suggesting the rise is being driven by speculators.

“Whatever the reason, this may give farmers the opportunity to lock in to considerably higher prices than were anticipated even a few weeks ago.”

This increased demand for agricultural products was likely to see an underlying increase in prices over time. But the level of volatility in these markets was also likely to continue.

“Risk management will remain a vitally important part of managing a successful farm business.”