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Forward contract cover low

Australian farmers have very low levels of forward contract cover against further falls in grain prices. Wheat prices rallied somewhat late last week after the $30/t freefall caused by this month’s US Department of Agriculture (USDA) stocks and plantings report, lifting by up to $10/t. However, analysts warn that with big plantings in the northern hemisphere, average conditions would lead to a large crop and place further downward pressure on prices.

In spite of the potential pricing risk, most industry insiders suggested there was little cover in terms of forward contracting among Australian farmers, saying that potential production risk weighed much heavier on the mind than pricing risk. The extremely dry start to the year in southern Australia has further exacerbated reluctance to lock in forward contracts. “Not a lot have much cover in terms of forward contracting, there was little appetite to lock in prices in the period after harvesting as prices were starting to slide off,” said ProFarmer commodity analyst Malcolm Bartholomaeus. “They may have been waiting for a rally, and that could still happen, but overall the level of cover is very low.” Agfarm Bendigo account manager Fabian Devereux said there had been little forward marketing activity for new crop. “There is very little happening out there and we don’t expect many farmers in southern Australia will do much while it remains so dry.”

Mr Bartholomaeus said there still might be a mindset against forward contracting following issues with huge costs associated with washing out contracts in 2007-08, however he added that this was not a true reflection of value of forward marketing. “There were issues then, but if that is touted as a reason for not locking in prices, then people are forgetting the huge gains that could have been made in the two years following 2008, where the best prices for the year were earlier on in the piece,” he said. Grain Producers Australia chairman Andrew Weidemann agreed that production risk was the major reason many farmers did not embark on significant forward marketing programs. “There’s no doubt those washouts really hurt a lot of farmers who just don’t feel comfortable forward marketing now,” Mr Weidemann said.

Even products where it is possible to avoid exposing the business to production risk, such as bank swaps, have not gained a significant amount of traction, which Mr Bartholomaeus attributed to a lack of understanding about the products. “There’s still a lack of education in the farming community about how swaps work and how difficult or easy they are to manage,” Mr Bartholomaeus said. “People who have been using them for a while are comfortable with the process and understand the benefits they get, but they probably haven’t caught on with a lot of farmers.” Mr Devereux said farmers preferred to focus on production and that meant many were nervous in embracing marketing products like swaps. “There are growers out there that are a little reluctant to use products they don’t fully understand and don’t necessarily have the time to manage,” Mr Devereux said.

Mr Bartholomaeus said rather than market grain prior to production most growers appeared happier to market post-harvest. “Since deregulation there is more flexibility in the market, growers have 12 months to market harvested grain and are taking advantage of that.” Mr Weidemann agreed, saying farmers were far more comfortable managing their marketing program with grain in the bin. “They prefer to market physical grain after harvest rather than having to worry about the seasonal prospects of the crop.”

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