Risk management has become increasingly important for many farmers during the last 18 months. With this is mind, Mark Smith, Trading Director at one of the UKs leading seed and grain merchants, Saxon Agriculture, talks more about his work and the various contracts on offer to help growers manage volatility.
Saxon Agriculture started trading in 1993, originally set up to source malting barley for parent malting business, Bairds Malt. The business has grown and evolved over the years, now buying and handling every combinable crop produced in the UK, as well as being a major wholesale seed business.
Q – How have you adapted to the changing marketplace during the last 2 years?
A – We have seen unprecedented change during that period, which has been driven mainly by price, as demand has grown from a more affluent and increasing world population. More grain is being used in the Bio-fuels sector, in the USA alone over 100 million tonnes of maize is now annually converted to Ethanol. Grain markets in today’s era are finely balanced and slight changes in supply and demand projections, and increased speculation from the wider investment community, can create volatile price swings.
The harvest of 2007 was particularly poor worldwide causing grain prices to double. The 2008 harvest was far better and prices corrected sharply as the world moved from a supply deficit to a surplus. Estimations for 2009 suggest that the global harvest will not be the disaster of 07 or the bumper crop of 08 but somewhere in between, therefore keeping a lid on prices in the short term, but keeping the market sensitive to production concerns for the 2010 harvest.
We adapt by investing a vast amount of time and effort into interpreting market movements correctly, by introducing risk management products and identifying the right new varieties for the UK, whether that’s malting barley or other commodities such as the recently launched Gallant Milling Wheat.
Q – How do contracts with merchants benefit the farmer?
A – As we try to bring new ideas and varieties to the marketplace there are two main elements for the farmer to consider, firstly the agronomic benefit of the new variety and its potential yield and secondly ensuring that, having grown the new variety, there is a market for the grain. Take Gallant as an example, we have guaranteed to buy the crop back from the farmer after the 2010 harvest at the full group 1 milling premium. We always accompany new varieties with a contract to buy the grain back so not only can the farmer take advantage of Gallants additional yield, (5% more than Solstice – the current established group 1 milling wheat) but he also has a secure end market by selling the grain back to us.
Q – How diverse can your contracts be?
A – We offer growers a number of marketing options for all the commodities we deal in:
1. Fixed price option – We guarantee a forward price or premium on a fixed basis and once the deal is done then that is the price the grower receives.
2. Minimum/maximum pricing contracts – this allows farmers to guarantee a minimum and maximum price for the crop. Again using Gallant as an example, farmers can ensure they will receive a minimum premium of £20 over feed, and a maximum of £40, with the option to convert to a fixed premium at any time. This is another tactic for farmers to consider and delivers a greater degree of security rather than just waiting to see what the overall prevailing group 1 milling premium will be. Min/max arrangements are also offered for feed grain and malting barley allowing the farmer to better manage inherent price volatility.
3. The Saxon Managed Wheat Fund – Farmers utilise our market analysis and trusted industry knowledge by committing an agreed tonnage of their grain crop to us, we then make all the trading decisions on that amount of grain. This method has consistently returned excellent value to growers, often giving leading returns and outperforming that sector of the market.
Q – What advice can you give to farmers who may be considering using similar contracts?
A – In all contracts the devil is in the detail. Not all contracts are the same and not all companies trade contracts in the same way. Try and ensure the contract states that there are no defaults for failing to get the quality right. When Saxon buy a premium commodity from a farmer, whether that’s malting barley or milling wheat, we will not default farmers for failing to reach the milling or malting quality required. The weather is impossible to predict and is always the main factor working against the grower. It’s important to have a system in place that allows the merchant and farmer to work together right through to harvest.
Q – Can you predict what will happen with the market going forward?
A - It’s very difficult to predict. I forecast that we will see further swings in prices and volatility. The World population is growing, as is bio-fuel demand and every year the big unknown is the size of the crop in the UK and across the world. Supply and demand are so finely balanced, price volatility is inevitable, but there are tools available to growers to reduce price risk, such as the min/max contracts mentioned earlier. The use of traded options is falling out of favour as volatility has increased and option premiums become more expensive, although they do still have a place in a good market strategy. There is still a certain amount of mistrust of merchants and a misunderstanding about how risk management products work. Saxon is working hard to communicate effectively to farmers in order for them to better understand all the opportunities on offer that can help develop and implement successful strategies.
Q – What is your focus for the next 6 months?
A - We are working with 2 new winter malting varieties that are going to be at the trial stage in 2010, Purdey and Winsome, and a new milling wheat variety, Kingdom. We continue to work hard to identify new varieties that will have real potential and, through sourcing and multiplying up the right varieties, we can then offer farmers the chance to be the first to have access to those new varieties. Gallant is a good example of how that can work - Saxon were a main producer of the Gallant seed available, for sowing this Autumn, through taking the risk of multiplying up the seed stocks over the last growing season, before industry approvals were secured. Demand has been very strong but we do have a small amount of Gallant seed available and expect it to sell out very soon.
Our focus will continue to be on analysing global market developments in order to make the appropriate marketing decisions, both for our trading book and the grain committed to us by farmers in the Saxon Managed Wheat Fund.
