In order to forward sell grain, we must know our costs
Tillage farmers are heading into the 2023 season with some trepidation. Input costs have increased to unprecedented levels and positive crop margins can only be sustained by a continuation of current high grain prices and high yields. Often an elusive combination.
While tight margins on tillage farms is not a new phenomenon the new reality is that the cost of growing a hectare of cereals is so high, that the financial consequences of a poor harvest are higher than ever before.
Variable costs could increase by up to 65% for winter wheat in 2023 when compared to 2021. A comparative figure for spring beans is estimated to be much lower at 21% reflecting the impact of high fertiliser prices.
Fertiliser is the real bogey. The high grain price seasons of 2021 and 2022 were very profitable for tillage farmers with low fertiliser costs in 2021 and while fertiliser was expensive in 2022, many tillage farmers had negotiated prices prior to the big increases. However in 2023 everybody is starting at the same point.
While fertiliser is the main driver of higher costs it does not stand alone. We have already seen seed costs increase by €150/t, chemicals are expected to increase by 10% and machinery running costs have also increased.
Is forward selling the ultimate risk management tool? Forward selling grain can play a role in minimising tillage farmers financial risk exposure, particularly during a period of inflated input costs. Most of the major grain buyers offer forward selling options to their customers but uptake is still relatively low. The majority of farmers wait till harvest and take their chances but this is fraught with danger. We are now in a time of high grain prices but it is difficult to know how long this will last.
Most growers received in excess of €300/t for green barley price at 20% moisture this harvest, the ten year average is €172/t.
Understandably every farmer wants to sell at the top of the market but maybe it is more prudent to sell a proportion of the expected harvest at a price that is making money rather than going for broke at harvest. Selling little and often works better than gambling on hitting the highest prices.
We need to be realistic about yield and only sell a proportion of the crop. Working from the five year average yield for a crop on the farm is a sensible approach rather than an expected yield. Many growers will remember 2012 when a bumper harvest looked likely in June only to be undone by one of the worst periods of harvest weather in modern times, resulting in many growers unable to supply the contracted tonnage of forward sold grain.
Fertiliser could be in excess of 65% of total material costs for cereals this year so selling grain at the same time as purchasing fertiliser can insulate against fertiliser costs, once the crop is achieving a positive margin at those prices.
In order to forward sell we must know our costs. A crop budget is essential. Establishing material costs is a relatively straight forward process but machinery is tricky and very important as machinery can be as much as half of the total costs. It is worth spending some time with your advisor or accountant on this as experience in Teagasc suggests that machinery costs are more variable across farms than material costs. Contractor prices are a useful guide but may not reflect the machinery profile on the farm.
As the nights draw in and field work reduces in there is no better time to review the financial situation on the farm and invest in risk management.
‘If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business’. Gary Cohn.