Commodity contracts are a farming weapon for reducing the risk of purchasing inputs in a variable market. Often overlooked by family run livestock producers falsely believing they are only something for “larger” run businesses or corporates, grain contracts are a great asset in managing and protecting the bottom line from seasonal fluctuations in commodity prices.
The most essential point for farmers determining whether or not to enter a grain contract is at what point the milk price allows you to make a profit. If you have a clear understanding of the point where your business makes money, then determining when to contract becomes much easier. A good rule of thumb is to only lock 30% of your grain needs, over 50% of the time (eg if you need 1000t for the year, look at contracting 300t for 6 months). This way you don’t over-commit to the market and can play the benefits of both a rising and falling market.
Using a 30% ratio of grain volume under contract for 50% of your time is a form of risk management that doesn’t necessarily mean you will always achieve the lowest price paid for the year, but it is a way of mitigating risk against price rises and achieving the best average price and winning that battle more times than not over 12-months.
As an example if a farmer were to know that at a given milk price profit can be made from grain at $400/t then any contracts under $400/t should be looked at. Using the 30:50 rule, if 300tonnes was purchased at $350/t and the market falls to $300/t then the farmer has an opportunity to purchase another parcel of 300t creating and average $325/t cost and improving his profit margin by the factor of $25/t. If the market were to rise, he has the profit from 300t already locked away and can look at other strategies for his remaining requirement.
The price at which grain contracts are valuable will vary farm to farm depending on individual business management strategy and what may be a good price at one time may not at another as milk price changes. Contracts are about protecting profit and not trying to lock in the lowest market price. Know your profit point and the strategy should deliver more wins than not.
For more information about how Reid Stockfeeds can be of assistance in helping you with any grain contract needs please contact Marcus Dingle at our Colbinabbin Office – 54 329 273.