LAST year is well and truly in the rear-view mirror, a place many people hope it stays after what can only be described as a trying year.
Between drought, fire and below average results financially, we must remember these are factors out of our control. What we can have a say on is how to manage the risks that our business is exposed to.
Farming, in a nutshell, is about risk management, with the two biggest risks to a grain producer being price risk and production risk. At any one time, one is always higher than the other, with these levels helping us to make decisions about selling grain. The past two seasons have seen huge amounts of grain required domestically in areas under extreme drought. This has created a marketplace with a focus on production risk.
Higher prices at harvest have seen many producers question the value of the forward contract. The dreaded 'washout' word has also played a factor. These are our recent memories and they shape our immediate thinking about what to do and which option to take when looking at managing pricing.
While we've been in drought, the world has continued to trade grain with our typical export markets looking elsewhere for the commodities they need.
What happens when average production returns?
In the domestically-driven market, we haven't had to look beyond our shores for indicators to what the price is doing. Our pricing drivers have come from the east and from spot demand for feed grains by feed millers.
While we've been in drought, the world has continued to trade grain with our typical export markets looking elsewhere for the commodities they need. These overseas buyers have had to work with grain they don't typically get and are learning the best way to do so. Quality and Australian grain are no longer the top priority.
With average production, we return to competing on the world stage for our share of the export market pie. What happens overseas plays a greater role in determining our local pricing. This increases the price risk associated with our grain production.
A good season developing in the Black Sea region or the United States can mean lower global pricing as supplies increase. This could lead to oversupply and prices lowering even further if demand is not there to support it.
A good example is in feed grains. Global feed grain demand has steadily been growing due to the increases in animal protein production. But, African swine fever has changed the demand for feed grains into China, as a huge amount of pork production is lost. The rebuild is still another 18 months away, at least, so where does all our extra feed grain go?
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In the past two years, this hasn't mattered. Domestic feed grain demand has meant we have not had to rely on our traditional markets as much, but this can easily change.
So how do we manage this risk? One way is to take out a forward contract. We know traditionally, and from 13 years of pricing data, that $300 a tonne is a profitable price for wheat.
Uncertainty about the season may dampen the enthusiasm for taking out a forward contract, but we can ensure some robust guidelines are in place to help guide decision-making. Through matching decision-making to price deciles, the amount of moisture in the soil and the forecast for the season, we can remove some of the baggage from previous experiences.
At this point in time, all we can assume is average production. If we have average production, as mentioned before, we will be looking at a very different market.
As growers, we need to take the lessons, not the baggage, of the past two years and keep moving forward. Each season is a new season and will have its own challenges for us to manage.
Hopefully, this season, our challenges will be more average.
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