Farm Ireland
Independent.ie

Friday 9 December 2016

More being forced into forward pricing

Published 18/01/2011 | 05:00

Meathman Eddie O'Donnell manages 4,000 cows on three different farms based around Berne in the US cornbelt state of Indianna. With little land other than that taken up by the sheds, O'Donnell's Irish Acres operation is almost totally reliant on bought in feed.

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"Availing of forward price contracts has been standard practice in the grain business here for many years," he says.

"Grain farmers often sell a portion of their up-coming harvest on a weekly basis.

"A lot of guys would sell at least 50pc of their produce long before the harvest ever starts.

"In the last 10 years, dairy farmers are starting to do more forward contracts with their processors. For example, Dairy Farmers of America, which is one of the biggest dairy processors here, will organise to forward sell any amount of your milk supply whenever you want. They don't charge the farmer the brokerage fees until the milk is actually delivered.

"Most of the milk here goes into Class III, which is mostly used for cheese making. The demand for this stream is the big driver of milk prices over here. The summertime is the worst time for milk price, purely because in the hotter months, people consume less dairy products like cheese.

"We're getting $19 per 100lbs of milk (approximately €0.33/l) which isn't great with the way grain prices have gone. Grain has effectively doubled in the last four months.

"Up to about two years ago, we were able to buy 80pc of our feed requirements off the combine and pay a premium for storage. But then grain prices shot up and volatility has really kicked in.

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"If grain prices go up, people tend to feed less, which in turn reduces output and generally helps milk increase a little. But the correlation between grain and milk prices is getting weaker.

"It takes only a tiny change in the balance between supply and demand to create a disaster with price. A 1pc move either way has a huge impact.

"I'd say less than 10pc of the US's national milk output is locked in at forward contract prices. A lot of farmers are reluctant to lock in because they might have tried it in the past and got badly burned.

"I'd say even with the huge volatility over the last two years, the guys who have been locking in significant chunks of their output over the last decade are probably only a couple of cent per gallon ahead on price.

"The flip side of this is that some of the guys who didn't lock in are now out of business.

"Most lock in because a bank advises to. Farmers are generally advised to forward contract an equal amount of inputs too, so that they can lock in a margin.

"It certainly leaves you in a safer place but are you really going to be more viable? On larger farms where you are dependent on the price of one increasingly volatile product, it makes a lot of sense. But to really grow, you need to be able to take advantage of the good times when they come. I'm also not convinced that I would be as motivated to get out of bed in the morning if everything was locked in. I suppose farmers are natural risk-takers.

"So far this year, we haven't locked in any milk but we may have to in order to safeguard the business. If we had deep enough pockets we wouldn't consider it."

Indo Farming