Tuesday, September 26, 2017

Make sure to ride the grain market rollercoaster to your advantage

September 12, 2017 by  
Filed under Crops

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Growers should embrace volatility as a profit opportunity – not a threat, says Jeremy Cole.

After months of relative calm, the grain market has sprung into life and is more manic and unpredictable than the Mad Hatter’s tea party.

Understandably, some farmers are so confused they’ve jumped into the teapot and put on the lid. This has been the correct decision over the past six months or so, beating all other trading scenarios, and every so-called grain marketing guru.

Uncertainty is everywhere. The Brexit process continues to move forward at a snail’s pace, the result of this summer’s general election took almost everyone by surprise, and a rain-soaked harvest has seen more market gyrations than Elvis’s pelvis.

But such volatility is good for profit opportunities – so long as you manage it correctly. So much so, in fact, that even some big traders like the mighty Cargill have blamed the lack of volatility on poor profitability prospects.

Their traders thrive on volatility to make money. As American marketing expert Leon C. Megginson once said, it is “not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.

Windfall

Luckily, those farmers who have not sold in the previous months have achieved a windfall gain. It might be raining but the northern hemisphere remains relatively dry. Growers who sold previously, using options, because they thought the market might rise, have also benefited.

The only losers are those who have previously sold with no cover. They are getting more dismayed by the day. So what should be done from now until the Nov 2017 options expire or the harvest 2017 marketing season ends?

All underlying supply and demand indications are that the world is long of wheat. World stocks are the highest on record and the stocks-to-usage ration is 25-35%, depending on whether China is included in the figures.

But northern hemisphere crops look to be well down, due to relatively dry weather. It is dry in Australia too. This increases the competition between internal and export markets – which is all well and good for the farmer.

Until the weather changes or northern hemisphere crops are all in, factors suggest that the general world prices are firm, underpinned and unlikely to fall dramatically in the short term. Yet I remain confident that the market remains unpredictable.

In fact, I believe it could still rise by more than the £7 or £12 needed to pay for a November 2017 option by mid-October – or a May 2018 option by next April. August rain has not helped the situation. We are seeing variable yields, qualities, hagbergs and pre-germinations.

Important

But a word of caution is important. With ‘profits’ of £10-20/t being made on earlier set up options, I am encouraging my clients not only to strike out and to take their profit but reinvest it in a maximum of half their total sold tonnage with a May 2017 option.

This way, clients are exposing themselves to less risk as time unfolds. Why? Because the more the market rises, the nearer it must be coming to the top – and those clients are only reinvesting out of previous ‘profits’.

If the market rises at all from today, some premium will be recouped. Above a £12 rise (less than 10% price movement) any further increase is ‘profit’. Maybe more importantly, if the market does not rise before mid-April, then £12/t will be lost – equivalent to only £6/t across all the crop sold.

This will be much less than the capital loss would have been if the original option were kept (because twice the tonnage would have been exposed). Also, it is likely to be much less than the loss in value of any unsold grain or the cost of storage it for nine months from harvest

It is also a worry-free approach. After all, why worry about the market when, for such a small average premium, you can negate the downside risk? These are excellent prices, far better than when the crop was planted, so the margin is much better too.

Protect what you can’t afford to lose, take these better prices and be happy.

> Dr Jeremy Cole, BSc Agr Econ (Reading), runs Agricole – an independent grain brokering and marketing service for farmers. For aweekly grain market report, call 01954 719452 or visit www.agricole.co.uk

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