Control grain price risk

23 Sep, 2013 10:02 AM
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WESTERN District, Vic, dairyfarmer Lachlan Sutherland has moved to take control of grain price risk in his business after a horror autumn season this year left his business exposed. Mr Sutherland, who milks 370 cows in a 50/50 share-farming agreement on his parents' 182-hectare farm at Larpent, Vic, has engaged a grains consultancy firm to provide information about the grains market and help him use things such as forward contracts and futures market based products.

Last season dry conditions meant the dryland farm stopped producing grass in December and didn't start again until May. The farm produced just 2.5 tonnes/ha of grass for the season - compared with normal production of 6.5-7 tonnes/ha.

That left Mr Sutherland relying more heavily on bought-in grain, and combined with the lower milk price, meant his business took a real hit. He estimates bought-in feed leapt to 60% of his income,

"We can't make it rain, but can you take some of the risk out of it," he said. "That's what's driven it - if we hadn't had a year like we just had he (the grains consultant) wouldn't be sitting here. Experience drives you to find solutions to problems."

The consultant, David Paton, from Geelong-based Lachstock Consulting, said dairyfarmers were highly exposed to grain markets, which had become more volatile since deregulation of the grains industry and abolition of the Australian Wheat Board and single desk exporting arrangements in the last decade.

He said his company did not try to predict where prices were going but looked at each farmer's business and desired profitability levels. In the case of a dairyfarmer, they looked at the milk price and grain price and put them in a budget and determined the margin or level of profit with which the farmer would be happy.

A dairyfarmer was naturally short in the grain market - because they always needed to buy grain to feed to their cows, he said.

If the market signals were showing that grain or milk prices were changing, a dairyfarmer might choose to enter the market (for example by buying a forward contract for some of their grain) to reduce the risk of a future price change on their business.

But despite their exposure to grain market volatility, few dairyfarmers were trying to lessen their risk or had much of an understanding of grain markets, Mr Paton said.

"The dairy farm has a big advantage because their position is pretty certain in that they know how much grain they need to buy in a season," he said. "That's the exciting thing about working with dairyfarmers because you really can take quite a lot of the risk out of things."

Home-grown feed

Mr Sutherland's farm system is heavily exposed to grain price risk. The farm runs high production Holstein Friesians, batch calving with about 50% calving in six weeks from May 1 and the other 50% calving in eight weeks from the last week in July. Cows are each fed about two tonnes of grain per year in the bail, including wheat, canola meal, maize and lupins.

All other feed is produced on the farm. Mr Sutherland, a former deputy chair of local Dairy Australia regional development program WestVic Dairy, was involved in the 3030 project that aimed to increase profitability by increasing home-grown feed.

The farm has a perennial ryegrass base, most of which was lost this autumn due to the dry conditions. It also uses annual and Italian ryegrasses to provide fed outside of the perennial growing season.

Crops are used to provide additional feed for silage and as part of a pasture renovation program. Paddocks are usually double cropped - with cereals planted first and cut for silage before rape or sorghum is grown.

An additional 115ha is leased in the local area, running young stock and being cut for silage and hay to feed to the milkers.

Grain buying

Up until this year, Mr Sutherland had bought most of his grain from a trader or as a mixed ration from a mill - but it was from an uninformed position about the grain market.

"We relied on them to feed us information about the market," he said. "We did buy some under contract - straight ASW contract - which they get freight and maybe a little premium on top - but it was always from a non-advised position. So they offered us the contract and it was up to us to decide, but we had no idea what the market was doing.

"So in the past we've gone each way - some years it's been beneficial and others above market, but we've never locked in more than 50% for that reason."

In the past, Mr Sutherland had also bought some grain from "truckie traders" but had problems with quality and reliability and so had moved to using a trader because quality was then assured.

Mr Paton said the grain industry did not appreciate the importance of quality to dairyfarmers. Lachstock Consulting sells testing kits to dairyfarmers to help them determine the basic quality of the grain they were buying.

The kits assess test weight and screenings from a sample, which farmers should take before accepting any delivery of grain. This was the minimum every dairyfarmer should do to start to take control of their grain buying, Mr Paton said.

Mr Sutherland said since signing up with Lachstock Consulting he was better informed about the grain and dairy markets than he had ever been in the past.

He receives daily, weekly and monthly emails from Mr Paton about market movements. The daily email provides a quick two-paragraph summary of anything that might be influencing markets while the others provide more detailed information and longer term forecasts.

"It's been a massive learning curve for this business," Mr Sutherland said. "I haven't got time to research market. I trust that the information that arrives is right, and you do cross check it - I hear on the rural news that something has happened and you see a result.

"If you look at what engaging this company costs compared with your grain usage it is a relatively small amount. I only have to save $5 a tonne on grain for them to pay for themselves."

Mr Sutherland said he was now informed about the true market price. He also hoped that he would be able to use Lachstock's network of graingrowers to source grain.

Rapidly changing prices

Mr Paton said the Australian grains market was now more exposed to global prices. This meant prices changed rapidly in response to world events.

"Grain markets now react quickly to any information that could affect global supply and demand," he said. So for example, buyers in Asia might see problems in a region from which they normally source grain and so would quickly move to get supply from another country.

Technology and speed of communication had also made the markets more efficient and quicker reacting, he said.

Margin control

Although Mr Sutherland has not yet bought a grain forward or futures contract because of the current position of the market, he said he saw the potential of these to give greater control to his business.

He would like to see milk processing companies move to offer some risk management tools around milk price as well - such as the guaranteed minimum milk price being offered by Fonterra in New Zealand.

"I would lock in a milk price and lock in a grain price and if that could cover all my expenses and make my desired profit margin I would be happy," Mr Sutherland said. He said even if this meant he missed out on the highest milk price or lowest grain price at times, it would be better to be able to reduce the risk in the business.

Carlene Dowie

Carlene Dowie

is editor of Australian Dairyfarmer magazine

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