Hedging a sound option for grain producers

Richard Perkins, Market Check, says a hedging strategy is a sound policy for grain growers.

Richard Perkins, Market Check, says a hedging strategy is a sound policy for grain growers.

IN THE years since deregulation growers have become increasingly confident in their ability to store and market physical grain post-harvest to take advantage of any rises in price.

However, there is still a reluctance to play in the derivatives space, which many growers attribute to the hard lessons learnt in the 2007 season when growers with excessive amounts of grain forward contracted were forced to pay high wash-out fees when they could not meet contracts.

Richard Perkins, general manager of business development with grain marketing advisory business Market Check, said growers were working well with post-harvest marketing, but added some use of hedging products would increase returns even further.

“Our research has showed in eight out of ten years some form of hedging, combined with physical sales, is your best bet in terms of overall returns,” he said at the Innovation Generation conference in Wagga Wagga last month.

Mr Perkins said growers did not need to give up their physical grain marketing programs they had become comfortable with to participate in a hedging strategy.

“It is not one or the other, indeed we are finding the best returns are with a mixture of both strategies.”

“You can look at trends that have emerged and are regular factors, such as the basis being crunched at harvest by harvest selling of grain and work around that by hedging your basis at another time to give you a better bottom line.”

He said the use of put options could also be utilised to ensure a baseline price.

“It can be a very low risk strategy and is something we advise people to look at.”

Mr Perkins said post-harvest there were also trends farmers needed to be aware of.

“Generally we see the higher premiums for high value wheat grade like H1 and H2 immediately after harvest, later on as feeders are looking for product it comes back, so if you have that type of grain moving it quickly is often the best course.

“On the other hand, if you have ASW or lower protein wheat, later in the year, by May or June, often those big discounts have disappeared.

“By having a grade spread hedge in place you can make use of these movements without the risk of the overall price dipping dramatically.”