Grain Contracts
Why consider grain contracts?
Contracts take away the risk of paying high prices during the next season. This is a form of risk management.
Who wins in a grain contract?
In the long run both the grower and purchaser should win by having a more stable price for the commodity being traded. If dairy farmers always paid less on contract than the spot price, then growers would soon stop locking in their crops at these prices. This year many farmers with grain contracts have been paying around $10 per tonne more than spot price since early winter. The has cost them very little but has guaranteed that they will not have to pay any higher figure.
Should contracts be locked in every year?
In most years, the grain contract price will not vary considerably with the spot price on average for the whole year. However, if the spot price changes significantly over the year, it will vary from contract price. For example, in 1997-98, the grain price rose to over $200 per tonne whilst contract prices were at $150 per tonne. Conversely in 1998-99, contract prices were at $200 and spot prices dropped to $160.
Astute farmers will tend to lock in more of their grain requirements when prices are lower than average and be less tempted to use contracts at higher prices. That way they guarantee staying at the lower end when prices are strengthening and they take advantage of lower prices when they fall from a high level.
How does today's market look?
Current world grain prices are still weak. They are well below 10 year average prices and are unlikely to rise in the short term. Canada and Eastern Europe have had a poor barley harvest and much of Australia's crop is excellent quality.
It is likely that feed barley will be scarce so barley prices have firmed in response. On the other hand triticale and wheat are in high supply but with low demand. This gives us the opportunity to lock into high quality feeds at below long term average prices, guaranteed for next year.
What is the likely price trend in the next few months?
Like the weather it is not possible to accurately predict this market trend however, we do know that spot prices over the harvest are usually lower than new season contract prices since storage costs are not included.<p>
However, if world demand for feed grains strengthens in the next few weeks, this will lift harvest prices. If supply weakens due to poor future crop forecasts, this will also lift prices. Given that prices are at lower than average levels now and well below what growers would like to receive to cover long run costs, it is unlikely that substantial quantities of grain will be offered for contract by growers at low prices. They will prefer to pay storage costs and hope for a price rise later.
Recommendation:
This is another good year to lock in next years, March - October, grain requirements. Triticale and ASW Wheat at $150-$160 are good prices. Unless barley is $10-$15 lower it will not be as attractive. Mixing triticale with wheat reduces the acidosis problems associated with wheat only.
There are a number of arrangements for contracts which vary between grain merchants. Contact your regular supplier to ascertain their current contract price.
A delay of several weeks may see prices change. The likelihood of contract prices rising is greater than the likelihood of them falling.
Click here to view the rest of the 1999 November newsletter.