When will I start managing my price risk? by Andrew Angus*
GroundCover™ Issue: 19
We've all heard the saying 'it's too late to shut the gate after the horse has bolted' and yet the more people I speak to, the more I realise that this is exactly what is happening in the Australian grain industry.
Last year the ASW wheat pool hit a high of $245/t in July and yet even at this level, when prices were at record highs, growers were reluctant to lock in these prices through forward cash contracts, futures contracts or options.
After July 1996 the ASW pool price progressively dropped throughout the year until it hit a low of $ 175/t in November. At harvest, most growers then entered the pool, many saying that they should have locked in at the higher prices that were available during the year. Luckily the old crop pool has rebounded to current levels, however it is still a long way from $245/t which was there for the taking this time last year. Again, why didn't growers lock in prices?
I'll give you the main reason that continues to pop up when talking to growers as to why they adopt a passive role on risk management and don't use forward contracts, futures contracts and options. They don't fully understand them. No one has ever explained in detail how to use them and there is very little literature available to growers to assist the education process in this very important field. As a result many growers don't know how, with enough certainty, to introduce these tools into their farm management system.
The wheat futures contract at the Sydney Futures Exchange lacks volume because there are more consumers than producers who wish to utilise the contract. Did you know that you can sell futures in Sydney and then deliver physical grain against it? Did you know that you can sell futures in Sydney for 1998 delivery and make a profit even if you don't get a crop? Do you know that you could sell all your physical grain now and still put in place an option that would allow you to pick up any upside that may occur in world price?
What is the point of Australian grain growers being the most efficient producers of grain in the world if they then give away this advantage by not using all of the marketing options that are available to them to extract the best returns?
The great leaps forward that have benefited the grower in the past have been production-based improvements such as the introduction of ley farming systems (rotations), the introduction of fertilisers, the introduction of mechanisation, etc.
The next quantum leap forward for farming will not be production-related, instead it will come from growers developing a mastery of the risk management tools that are already available to them and incorporating them into their farming businesses.
Managing a cropping business is not just production, it is the risk management, the financing, the marketing and the credit management.
The grain industry should be encouraging some of the money paid in statutory levies to be directed at improving grower knowledge of the marketing side of their business. Just as grower productivity has been improved through greater production knowledge, I believe we should be looking to improve the financial position of growers by providing greater marketing knowledge. The whole industry would benefit from directing funds towards helping growers become even better business managers.
Wouldn't it be great if we could improve the Australian grower's marketing ability so that in years to come Australian growers were not only regarded as the world's most efficient producers, but also the world's smartest marketers?
For further information on forward price contracts, contact a grain buyer offering forward contracts.
For further information on futures contracts and options, call Grant Hinrichsen at the Sydney Futures Exchange on 1800 641 588 and get a free wheat futures information pack.
* Mr Augusts Business Development Coordinator, Bustan International.