Lessons learned in forward-sell decisions

GroundCover Live and online, stay up to date with daily grains industry news online, click here to read more
Lessons learned in forward-sell decisions - Figure 1

- By ORM Communications

Farmers who did not forward sell their wheat in 2011 took a big risk, says consultant Malcolm Bartholomaeus.

“At one stage it was possible to lock in prices of $360 per tonne (swap) or $330 per tonne (fixed price) but by harvest it had pulled back to below $215,” he says. “In fact many farmers would have been better off in 2010 with feed wheat prices.”

Figure 1 demonstrates the highs and lows of the APW wheat port-based export price 2011-12. Harvest 2010 prices were very strong at decile 9, while harvest 2011 prices remain above average (decile 5).

Fears of a repeat of 2010 prompted many farmers to get their crops off early, with the result that it was generally only crops in NSW and Western Australia that suffered rain damage. Nevertheless, wheat yields were disappointing for some growers in south-east Australia, with lower than average protein profiles in east coast regions.

While the price of H1 and H2 wheat is expected to remain firm, the price of feed grade wheat is languishing due to high global production. In the absence of drought or other global supply problems, it is likely that wheat prices for the 2012 harvest will be lower than for the 2011 harvest.

Malcolm advises against holding wheat in a falling market and urges caution when considering forward-selling options for 2012. “We need prices to be much higher to make forward selling look attractive,” he says. “Full profitability needs to be around $260 to 280 per tonne, so if you’re being offered a forward of, say, $240, you’ll be locking in a loss.”

A record 2011 canola crop (about 2.95 million tonnes), on the other hand, has delivered substantial rewards to growers. Oil levels are high (around 42 to 46 per cent), as are prices (about $500/t compared with $210/t for wheat).

“Even in December, at the bottom of the market, canola remained at a strong price ($490/t in South Australia),” Malcolm says. “It remains to be seen if soil moisture levels will be adequate to plant a similar-sized canola crop this season.”

High canola and wheat prices in 2010 meant that less barley than average was planted in 2011 (the harvest is expected to come in at just below 8 million tonnes). However, quality was high in all regions except WA, where 50 per cent of the crop was downgraded.

Unlike wheat and feed barley, there is a strategic advantage in selling malting barley at harvest, and farmers who did so achieved good prices (up to $230/t) through to the end of November. However, east coast malting barley easily met domestic demand, and high global supplies quickly pushed prices down to feed quality prices (about $190/t) in December.

Feed barley prices for export have since risen to new highs for the harvest/post-harvest period in South Australia ($205/t) but remain flat at around $190/t in the east. However, export demand, particularly from Saudi Arabia, is expected to increase over the next few months, which may encourage farmers to hold onto their stocks.

Legume production has been satisfactory, but prices of lentils are a low $415/t. Chickpeas are $440/t, peas have had reasonable prices ($300/t), while faba beans are “going through the roof due to shortages in edible bean production in countries like Mexico”.

Figure 2 shows the average prices received at harvest 2011 for the major crop types (red bars) compared with the long-term average price from 1996 to 2011 (green bars). The 2011 harvest prices for most grains were close to, or slightly above the long-term average. Lentils were well below the long-term average while grower satisfaction with canola in the 2011 harvest would be  reflected in the $100/t premium over the long-term price average. 

Lessons learned in forward-sell decisions - Figure 2

GRDC Research Code ORM00002

More information: Malcolm Bartholomaeus, senior commodity analyst, Profarmer Grain, NZX Ltd, 03 9514 9002, www.profarmer.com.au

GRDC Project Code ORM00002

Region National, South, North