We all have choice

The question: what is the future of the family farm?

The answer: not what it was yesterday

While agriculture continues to do today what it did yesterday and bemoans returns were better historically than presently the future will remain the future.

Simply put, work out what the costs and returns will be tomorrow, today, and if you don’t like the answer consider what else you will do tomorrow.

Stunningly simple, but how many do this on a consistent basis? Furthermore how many know what it is they want from tomorrow, how much it’s going to cost and is it achievable. Again, if it’s not what are you going to do to change it?

How many family farms have a strategic plan as a guiding document for the future, and long term budgetary projections to match?

There is only one clear answer in this blog; the future isn’t what it was yesterday. But the answer raises more questions. Questions, as individuals we need to answer before we complain today’s returns are not suffice.

We all have choice

Head down, bum up….get on with it

Some people are going to find this blog confronting. For too long in agriculture we have shied away from the hard facts and the hard decisions. I’ve been one of them. I fought wheat deregulation in 2007/2008. Now it’s gone I don’t miss it and wouldn’t want it back. Too often we fight change and then wonder what the fuss was all about after we made change.

With the advent of smart phones, social media and a little time the world is a far smaller place. So when I had 5 minutes to spare I watched the twitter feed streaming from the NFF’s Congress.

After 5 minutes I wondered why I did. Coles tell us food prices are high compared to the rest of the world, Sefton
and Associates told us we were losing the fight to Animal Activists and from plenty of people’s comments it appears we have a dearth of young leaders.

It made me wonder why I am in agriculture. I have been as guilty as any one; endless conversations about why we farmers are screwed over and how there’s no margin in it. It becomes a tiresome talkfest where you end up finishing where you start.

That got me thinking, what’s the solution?? Then I recall some words may father would say to me when I was on SAFF’s Grains
Council and a member of my local Council: “put your head down, arse up and get on with the job…no point in talking about it

Agricultures the best at talking itself down, looking for excuses and as long as we can blame someone else we run with it. My dad’s words have never been more relevant. Free of external commitments I have put my head down and arse up, and the rewards are evident. They weren’t when I was attending every meeting in creation.

Plenty of tweets from the NFF Congress talk about future leaders. One can argue leaders are born, not made, but that’s a whole different story. One thing a leader does need is a cause, or an industry. Let’s get the industry working and the leaders will emerge. Until the industry is working (profitably) there won’t be many attractions to participate. More so future leaders will remain that, future leaders.

Remember, we all generally choose to farm. Rarely are we forced to do it. We are a capital intensive industry so if one chooses to exit there would be equity left for the next phase of life. Unfortunately two of the biggest factors in choosing not to exit are emotion and fear. History or emotion, many businesses are long term family businesses and one doesn’t want to be seen to be ending the dynasty. Fear, what will I do, will I be employable?

If the emotion and fear could be removed agriculture would be better for it, and families would be better for it.

Recently I tweeted “agriculture doesn’t have a responsibility to provide food and fibre for the world and the world doesn’t have an obligation to pay more for it”. Consumers and farmers have a conflict of interest; consumers want to pay less, farmers want to be paid more. Currently consumers hold the upper hand in market power stakes. The only way to shift this is to shift the supply and demand equation. Until we farmers stop complaining about skinny margins, and start to shift the supply and demand equation we don’t have a leg to stand on.

Farmers exiting and selling to a more profitable neighbour who can work with smaller margins is one way we can achieve this. Many will be concerned about small communities, and their survival. In a factual and logical and commercial debate this is a non issue, we are talking profitability and survival. In an emotional debate this is the issue. Unfortunately what I talk of now will be a reality in 50 years time, smaller rural communities. The solution won’t happen overnight, the industry needs time to adjust, but it can and must do it.

While agriculture sits and talks about it it won’t happen. When agriculture does it there will be no need for talking.

Inverse: a basic explanation

Recently the wheat market has moved to an inverse market. Fine you say, the market is upside down, so what does that mean?

A few of us have been discussing the market situation, on twitter. Happily we discuss the pros and cons of this situation, and what it means for marketing decisions. A few have questioned us as to what language we are speaking. I will attempt to translate for those who are not aware of what an inverse market is.

Wheat is traded on a “commodities market”. Basically a commodities market is designed to sell something today, for future delivery. Like it or not, wheat is in continual over supply, that’s what makes it a commodity, it’s easily interchangeable with other wheat. Because it is in over supply, and it’s easily substituted by other wheat there is not enough demand to use it all today. To encourage future delivery the market is always paying a higher price tomorrow. Most of us know this as carry, thus commodity markets can be described as carry markets, or “contango”.

When a market loses its carry, occurring when spot prices, or inter crop prices become higher in the nearer months, or crops, than the future crops this is described as a market inverse, or “backwardation”.  Another term used by traders is “bull spreads”.

The signal the market is sending is “sell today, not tomorrow”. As the price is higher in the nearer month, or the closest crop the incentive is to sell sooner rather than later.

Anyone watching the wheat market on CBOT will notice this currently. March 2013 offers the highest quote for wheat on the board. And then the market goes into “backwardation” or is described as inverse. For us Australian’s December is the quote used to price our different season’s grains. Again, a glance at the quotes will show an inverse between Dec 2012 and Dec 2013. The market is saying sell your grain to me this year; don’t store it for selling next year. See CBOT Wheat  here

An even better illustration is the Winnipeg Canola market and the CBOT Corn market, both inverse from the front month (first month quoted) and between crops. You will also notice the spot, or cash price is the highest price quoted.

For a further explanation on this, from the NYSE, check out the link in the comments section of my blog on pricing grain. Open the link “ENHANCING MARKET TRANSPARENCY”

While there is much more to understanding market signals, a basic understanding on carry and inverse market conditions can help, and I hope this assists.

 

Pricing Grain in Australia: A Simple Outline

Australian farmers are some of the most efficient in the world. We are also some of the least subsidized in the world. Figures I saw in August 2007 suggested less than 9 per cent of agriculture’s income came from subsidies, the main contributor being drought assistance. Drought assistance, in that form, is no longer available.

As a grain farmer I produce a bulk, undifferentiated product. Prices are set on the world market, generally in the United States. To give people a general outline of how my price, for wheat, is set I will give a broad outline of the factors at play, and how they form a wheat price on my farm.

Before a farm gate price can be determine we first need to understand the world price. There are three main factors in determining Australian prices, futures prices; currency and basis

Generally the Chicago Board of Trade (CBOT) wheat price is used as a benchmark for international pricing. See www.barchart.com/commodityfutures/Wheat_Futures/ZW?search=ZW*
It is the most fluid futures market in the world. Last night (July 3rd) 48 800 contracts traded for the front month wheat. These are in lots of 5000 bushels, or 136 metric tonnes. One metric tonne equals 36.74371 bushels. Because Australia’s wheat harvest is generally in December, the Dec 12 contract (ZWZ12) is used as the basis for pricing our new season wheat. This last traded at US813.75c/bu

As wheat is traded internationally, in USD’s, the exchange rate has an impact on my returns. Like all Australian exporters the high dollar is hurting me currently. Out of interest, use the formula provided below, with an AUD of 75c.

The third factor in pricing wheat is a thing called the “basis”. Generally the basis is small, or negative. When grain is short in the domestic market the basis can become positive, revealing a domestic demand over and export demand. The basis is deducted from international pricing to form the AUD price, usually expressed as “delivered port” as a Multi Grade contract. The base grade is Australian Premium White (APW) with different grades attracting a different price. Premiums are paid for high grade milling wheats, discounts for lower grades of milling and feed wheat. See www.sturtgrain.com.au/public/editor_images/Prices%20040712.pdf

Here is a simple formula for determining AUD value of wheat, from CBOT ZWZ12 futures, and a spot AUD.

APW MG Pt Adelaide = (US futures/AUD)*Bushel conversion factor + basis

APW MG Pt Adelaide = 813.75 * 36.74371 + basis

APW MG Pt Adelaide = US$ 299.00 + basis

APW MG Pt Adelaide = US$299.00/A$1.002
+ basis = A$293.13 + basis

APW MG Pt Adelaide = A$ 284 today

Today the basis, relative to ZWZ12, is –A$9.13 This has been a very simplistic exercise in describing how my del Port grain price is determined. A grain trader would have a more in depth answer, with many more factors coming into play than I have mentioned, and this is what forms the basis.

From the Port Adelaide price I then deduct the location differential (freight) from my local site, Pinnaroo, back to Port. This year (2011/12 harvest) this was $31.79/tonne. Any grain I sell for 2012/13 delivery will be subject to the new season location differential. See http://www.graintrade.org.au/sites/default/files/file/Location%20Differentials/Location%20Differentials%202011_2012/Copy%20of%20GTA_2011_2012_LDs_SA_9_November_2011.pdf

Unseen costs in the delivered Port Adelaide MG price include storage and handling charges. These are deducted before the price is posted. These are approximately $35-40 per tonne. They are charged by the bulk handler in SA, formerly ABB Grain, currently Viterra, and soon to be owned by Glencore.

I hope this has given you a very simple overview of how grain is priced domestically, for export. While not designed to give the ultimate answer, I hope it helps identify the key components in the grain pricing pie.