Farm­ers as trade experts

Fresh play­ers in the mar­ket and new fac­tors influ­enc­ing pric­ing mean grain prices are fluc­tu­at­ing sig­nif­i­cant­ly more than in the past. When sell­ing their grain, farm­ers there­fore need to focus on good risk man­age­ment.

Olaf Stam­mer still remem­bers a time just 10 years ago when a farmer would be proud to sell for 15 cents more than his neigh­bour. “After the 2007-2008 sea­son and the onset of major price increas­es, it took me some time to adapt,” admits the farmer from Bad Schwartau in North­ern Ger­many. “And I am still learn­ing some­thing new every day.” In order to sim­pli­fy input pur­chas­ing and stream­line the process for trad­ing and sell­ing its prod­ucts, this fam­i­ly farm teamed up with three neigh­bour­ing grain pro­duc­ers to form a joint-stock com­pa­ny. Togeth­er, their oper­a­tion cov­ers 720ha, with stor­age capac­i­ty for 5,000t of grain and Mr Stam­mer man­ag­ing sales oper­a­tions.

412m t

Total vol­ume of grain trad­ed glob­al­ly in 2017/18 (FAO fore­cast, April 2019)

Adapt­ing to atyp­i­cal years

Today, Mr Stam­mer uses a secu­ri­ty strat­e­gy, while also main­tain­ing a sys­tem to enhance sales per­for­mance. “When I first start­ed trad­ing, I was mov­ing big batch­es – as time went on, I start­ed to break things up as much as pos­si­ble. Since then, I’ve some­times sold stock in tenths or twelfths. This allows me to feel more secure and to stay on top of the mar­ket,” he explains. “In con­trast, if I were to sell the har­vest in quar­ters, and then the mar­ket rebound­ed just after the deal, that could mean in ret­ro­spect I would have made a poor sale.”

Olaf Stam­mer

The farm com­pa­ny works with sev­er­al mer­chants: Con­tracts are drawn up in the spring, but most of the grain goes out at a fixed price between Decem­ber and the fol­low­ing har­vest. “What makes it dif­fi­cult is that there will always be new sit­u­a­tions and atyp­i­cal years, so it’s impor­tant to be able to react and adapt.” Mr Stam­mer also empha­sis­es how impor­tant it is for farm­ers to famil­iarise them­selves with the futures mar­ket. This makes mar­ket­ing and sell­ing the grain much more com­plex – but also bet­ter-informed. Although in the not-too-dis­tant past the farmer’s job was sim­ply to: “Look after his fields and his live­stock,” today the job requires an aware­ness of glob­al affairs going well beyond the imme­di­ate pro­fes­sion­al envi­ron­ment.

There will always be new sit­u­a­tions and atyp­i­cal years.

Olaf Stam­mer

In addi­tion to infor­ma­tion about glob­al stocks, the state of crop pro­duc­tion, exchange rates and input costs, Mr Stam­mer also con­sid­ers it nec­es­sary to keep an eye on polit­i­cal devel­op­ments, as pro­tec­tion­ist lean­ings halfway around the world can have a short-term effect – pos­i­tive or neg­a­tive – on the Matif com­mod­i­ty futures exchange in Paris.

Zero spec­u­la­tion

About 200km to the east, Roland Marsch trades crops grown by his two sons, one in Jar­men in the Ger­man state of Meck­len­burg-Vor­pom­mern with 1450ha (cere­als, rape­seed and sug­ar beet), and the oth­er in Esto­nia with 1,400ha. “It’s always dif­fi­cult to fore­cast how mar­kets are going to devel­op,” says the farmer, who worked in the grain trade for six years. “My rule of thumb is: When prices are rel­a­tive­ly good in com­par­i­son with pre­vi­ous years, you have to sell, with­out hes­i­ta­tion and in small quan­ti­ties. Try­ing to get the best pos­si­ble price for 100% of your crop would be dan­ger­ous­ly spec­u­la­tive.”

Roland Marsch

He cites the 2015-16 sea­son, dur­ing which an expect­ed price rise failed to mate­ri­alise, and he was forced to sell a large por­tion of his har­vest dur­ing a down­turn, with the mar­ket occa­sion­al­ly bounc­ing back via a few very short-lived bright spells. Tak­ing such a strat­e­gy in an over­all bear mar­ket allowed him to get the most out of a tricky sit­u­a­tion: “Suc­cess­ful trad­ing is also about courage; tak­ing action even when prices don’t seem that attrac­tive.”

Try­ing to get the best pos­si­ble price for 100% of your pro­duce would be dan­ger­ous­ly spec­u­la­tive.

Roland Marsch

In order to remain prof­itable, every strat­e­gy must take into account the inter­nal organ­i­sa­tion of the farm­ing oper­a­tion, warns Mr Marsch. “We have a lot of con­tracts, but we also make an effort to have only one buy­er per crop so as to stream­line deliv­ery costs as much as pos­si­ble. Resources, both human and mate­r­i­al, must be put to the best pos­si­ble use as part of an over­all sales strat­e­gy,” he explains. “And of course, work­ing with greater quan­ti­ties allows us to bet­ter man­age qual­i­ty para­me­ters via scal­ing mea­sure­ments.”

Clear objec­tives and strat­e­gy for mar­ket­ing

Patrick Bod­ié, head of “Mes Marchés” (My Mar­kets) at the Cham­ber of Agri­cul­ture in Aube, France, says it is impor­tant for each farmer to find the approach that works for him. For exam­ple, even though aver­age prices may turn out to be low­er than fixed prices, they may still be prefer­able when the farmer is hav­ing dif­fi­cul­ty in mak­ing sell­ing deci­sions. “In such cas­es, farm­ers are bet­ter off del­e­gat­ing sales oper­a­tions to their grain stor­age co-oper­a­tive.”

128 €/t

Volatil­i­ty of wheat price trad­ed at the French sea­port of Rouen between 2013 and 2017

In a more gen­er­al sense, Mr Bod­ié also rec­om­mends lim­it­ing the amount of time spent gath­er­ing infor­ma­tion, and instead keep­ing an eye on the big pic­ture. “Too much con­stant­ly- chang­ing infor­ma­tion can sti­fle our abil­i­ty to take action. Suc­cess­ful sales are not all about indus­try exper­tise, as some peo­ple mis­tak­en­ly think. Of course, you do need to know the mar­ket and the com­mer­cial tools involved, but the most impor­tant thing is to define a strat­e­gy and set objec­tives.” It’s essen­tial to estab­lish a spread­sheet of key val­ues, includ­ing the prof­it thresh­old, based on fixed costs and expect­ed rev­enues, as well as the farm’s his­tor­i­cal buy/sell prices. Based on the objec­tives in ques­tion (such as secu­ri­ty or opti­mi­sa­tion), the strat­e­gy will then set the next steps for upcom­ing sea­sons. “You have to be able to look down the road, and set your­self a pric­ing per­spec­tive over the next two years.”

Know­ing the fig­ures

Main­tain­ing a sim­ple and effi­cient approach to tack­le the com­plex­i­ty of mar­ket mech­a­nisms is the tac­tic favoured by Éric Col­lot. He heads a 112ha arable oper­a­tion near Prunay- Belleville (Aube), includ­ing wheat, spring bar­ley, sug­ar beet, alfal­fa, rape­seed, and phar­ma­ceu­ti­cal plants. “The hard­est thing about grain trad­ing is know­ing when to pull the trig­ger,” he says. “You can’t let your­self be tak­en in by the prices. I use the aver­age price of my sales from the last three years as a basis, and I sell every­thing that falls above that. I start from the idea that the costs from the last three years are rel­a­tive­ly con­sis­tent with my struc­tur­al costs, and I know what lev­el of prof­itabil­i­ty I’ve had at those prices.”

Éric Col­lot

With wheat yields high­ly sta­ble, Mr Col­lot (who stores most of his own grain) only sells at fixed prices. Hav­ing invest­ed in the mar­kets for the past 14 years, he retains futures trad­ing options to ben­e­fit from price ris­es, but rarely goes through part­ners for this, instead pre­fer­ring to main­tain his own futures mar­ket account.

You can’t let your­self be tak­en in by the prices.

Éric Col­lot

“In 2016, I had pre-sold 60% of my wheat before har­vest, because I noticed sig­nif­i­cant eco­nom­ic pat­terns that point­ed to a price drop,” he explains. “Due to very poor weath­er, that 60% end­ed up rep­re­sent­ing almost the entire har­vest.” Mr Collot’s intu­ition allowed him to come out of this dif­fi­cult sea­son in the black, with an aver­age reduced net price of €170/t. Despite the loss of income due to low­er wheat yields, the farm was able to secure a mod­est prof­it in the 2016-2017 sea­son thanks to the price achieved and the diver­si­fi­ca­tion of pro­duc­tion. “Weath­er pat­terns in recent years have made it hard­er for us to con­trol the quan­ti­ties, pro­tein lev­els, and spe­cif­ic weights. We must there­fore try to stay on top of as many aspects as we can in order to secure our rev­enue streams: First­ly in terms of prices, and also via very care­ful man­age­ment of all the oth­er eco­nom­ic fac­tors.”

Risk and oppor­tu­ni­ty

Although futures mar­kets will always car­ry a cer­tain lev­el of unpre­dictabil­i­ty, they do offer greater trans­paren­cy and there­by poten­tial­ly fair­er prices, insists Mr Bod­ié. He con­tends that farm­ers now under­stand this, not­ing that demand for train­ing in these sub­jects is grow­ing. A sur­vey car­ried out by the Aube Cham­ber of Agri­cul­ture between 2010 and 2016 showed that grain prices were the top fac­tor in deter­min­ing prof­it mar­gins, ahead of cost opti­mi­sa­tion and yield. Still, the com­mer­cial envi­ron­ment has changed con­sid­er­ably over the past few years, and those who ful­ly under­stand the mar­ket and are active­ly involved in trad­ing will be best placed to cap­i­talise on this.

270,5m t

Esti­mat­ed total glob­al wheat stocks for 2018/19

At the same time, we are also see­ing a boom in deci­sion-mak­ing tools. There are now a wide num­ber of options not only for secur­ing rev­enues in a dif­fi­cult cli­mate, but also allow­ing users to save or invest. “It’s also pos­si­ble to see a sil­ver lin­ing in increased price changes,” hints Mr Bod­ié. “On the one hand it’s seen as risky, but it can also be viewed as an oppor­tu­ni­ty.”

Price is not only deter­mined by weath­er any more

Glob­al imports and exports of wheat 2017/18, mill. t.| Green: export­ing countries/regions; Red: import­ing countries/regions

What does the inter­na­tion­al grain mar­ket look like right now, and what devel­op­ments are to be expect­ed in future? “Rus­sia, the Ukraine and east­ern Euro­pean coun­tries have become much more dom­i­nant in the sup­ply of grain to the glob­al mar­ket,” says Jack Watts, lead ana­lyst at AHDB – the UK’s grain levy board. At the same time, ris­ing invest­ment and the adop­tion of GM crops have pro­pelled Latin Amer­i­ca onto the scene.

Although the US and Europe remain the top-flight pro­duc­ers, the envi­ron­ment is becom­ing more and more com­pet­i­tive. “We are more reliant than ever on emerg­ing economies, which cre­ates a lot more uncer­tain­ty as these have less trans­par­ent mar­kets with more errat­ic weath­er, cur­ren­cy and politics.”While glob­al sup­ply is still sourced from a hand­ful of major exporters, import demand is becom­ing much more diver­si­fied. The key mar­kets are in north Africa, while the Mid­dle East and Sau­di Ara­bia are emerg­ing importers; the Saud­is in par­tic­u­lar are look­ing to increase imports to pre­serve their water resources, explains Mr Watts. Asian demand is also increas­ing, linked to its grow­ing mid­dle class­es and west­ern­i­sa­tion of diets.

Ris­ing wheat demand in Asia

Chi­nese demand for fod­der crops has soared in recent years, but the rest of the world’s abil­i­ty to increase pro­duc­tion to meet this demand has been under-esti­mat­ed, he adds. Chi­nese pol­i­cy also led to a rapid increase in self-suf­fi­cien­cy; so much so that pol­i­cy then changed again to run down the large maize stocks. “Chi­na report­ed­ly holds 40-50% of the world’s wheat stocks, but nobody real­ly knows.” Chi­nese demand will cer­tain­ly con­tin­ue to increase, but it will be dif­fi­cult to fore­cast by how much, giv­en the lack of gov­ern­ment trans­paren­cy.

In terms of pro­duc­tion, Rus­sia and Brazil remain the ones to watch. “Pro­duc­tion has increased sig­nif­i­cant­ly but the infra­struc­ture for exports has not kept up, cre­at­ing a num­ber of bot­tle­necks and dis­rupt­ing grain flow,” says Mr Watts. With the world now in a peri­od of rel­a­tive­ly low grain prices, invest­ment to improve that infra­struc­ture is unlike­ly to be forth­com­ing.