If you could set a minimum grain price and avail of any price increase in the market, would you do it? It almost sounds too good to be true.

Grain markets can be confusing and daunting. With so many factors affecting prices it can be a minefield, but farmers are becoming more and more conscious of selling a proportion of their grain over the course of the season. It spreads the risk and is a good management practice.

They are doing this because they realise that selling at harvest is typically not the best window of time to sell. After all, it stands to reason that prices will be weaker in years that do not have global production issues and you are selling when all the other farmers across the northern hemisphere are also selling grain.

Over the past decade or so, more farmers have tried to spread risk and they have been forward-selling greater proportions of grain. But many are still uncomfortable with the concept, fearing that they will lose out if an increase comes at harvest time.

However, it is important to remember that more often than not the lowest prices of the year come at harvest time as grain is cut across Europe and enters the market.

There is a chance that the price will go up on the way to harvest.

Take this season for example. A farmer who forward-sold barley at €140/t in April is now stuck with that price, despite the fact that the price is heading for €180/t at present.

In another year, this may have paid off. If the price had dropped to €130/t, that farmer would be happy to be getting €10/t above the harvest price. Over the course of different years, the gains and losses probably balance out, but a more steady income stream is established. However, price insurance is a tool that can help farmers to venture into spreading risk in what might be seen as an easier manner.

Price insurance

Rory Deverell is a risk manager at StoneX. For the past two seasons, he has been working with J Grennan & Sons to deliver price insurance to grain growers.

To put it simply, growers decide on a price at which they are happy to sell – worked out using crop costs and returns data.

Once the price reaches that mark, the grower locks into that price and takes out price insurance to secure the minimum price. The cost of that insurance could be approximately €10/t, but the higher the price set for the grain, the higher the cost of the insurance.

If the price goes up, the grower can still avail of the upward price. If the price drops below, the minimum price set the insurance means that the grower’s locked-in price is safe.

For example, if a grower had paid insurance to set a minimum price of €140/t, he/she could then take advantage of the increase in the market price.

In a year like this, when harvest prices look to be going to hold above the minimum price they set, farmers also have the option of cashing in their insurance. The price of the insurance moves up or down with the price of MATIF wheat.

This insurance protects farmers against a price fall before harvest and can be taken out even two seasons in advance of harvest. Table 1 shows that farmers in the trial started hedging when MATIF was €200/t and others took out price insurance when MATIF was €230/t.

“The farmers at the top end basically have a minimum feed wheat price of €185/t to €190/t when their payout from the insurance is included, not a bad worst case scenario” Rory explains.

He adds that as well as protecting against a price fall before harvest, there is a price insurance tool that gives farmers the option of getting a price top-up after harvest as well if prices rise.

Storage

This tool is particularly useful for most farmers, like Rory’s family, who don’t have their own storage. Many farmers may be considering storing grain at present as moisture contents on winter barley have been generally low.

“The cost of storage is ballpark €10/t to €12/t from harvest through to January or February.

“Your risk as a farmer if you do that is that, instead of the market going up, it goes down. So you’re paying €12/t storage and you might end up getting €10/ to €20/t less than the harvest price.

“This model allows you to sell your grain, get your cashflow with a discount on the price equal to the storage option premium. If the market goes up €30/t then you’ll get paid €20/t in January or February, but if the market falls, you’re only risking that €10/t and you’re not paying for storage.”

On-the-ground experience: price insurance

J Grennan & Sons has been offering its growers price insurance for the past two seasons and in the last few weeks asked the growers if they would like to cash in that price insurance.

Most learned that the value of the insurance had gone up.

“Overall, the farmers who took out the insurance while the market was very strong this year and were delighted with the way it worked out,” Conor Condron of J Grennan & Sons states.

“It has to be looked at as a win-win. Growers were protected against a low harvest price but were still able to benefit if prices were high. Harvest price is looking strong at the minute, so growers had the option to sell back their insurance.”

Conor explains that the insurance cost approximately €10/t.

The outlook for the harvest price is now the same, if not higher, than the minimum price which the farmers set their insurance at.

Therefore, growers now have the option to sell their insurance and, in some cases, the value of that insurance has gone up.

The insurance was offered to all growers and a cohort of farmers are using it. Conor notes that some of those growers have cashed in their insurance and made a profit as a result.

He adds that some growers may have forward-sold grain some time ago and are now stuck at that price, whereas those who took out insurance were guaranteed the minimum price, but could also avail of the price increase.

Support

“J Grennan & Sons isn’t making any money out of this. We’re providing this service to our growers to support them in any way we can.

“We strongly believe cereal growing, and tillage farming in general, is an essential component of the Irish agricultural industry. We see a lot of merit in this new grain price hedging system and that it is has the potential to become a very valuable new tool for cereal growers in the struggle to remain viable and protect themselves against market fluctuations.

“Even if the market doesn’t play ball, in the worst-case scenario in any given year, the most a farmer can lose is the price they paid for the insurance on day one.”

The need to manage risk

Rory Deverell explains that about 90% of Irish grain is traded on a wet or dry basis at harvest to roughly 40 large grain co-ops and merchants.

Looking back at the prices and offers in the grain market in Ireland for the past decade, Rory made a few stark observations. He told us that 95% of the time the price at harvest is not even within 20% of the highest available price leading up to that harvest.

The analysis also found that 29% of the time, the harvest price was among the lowest price the farmer could have sold at, in the lower 20% of the range.

Change is difficult. There are big perceptions to be overcome. For that reason, Rory believes that it is important to put alternatives in front of farmers who have the capability to bridge this gap, especially as those alternatives are already available to the Irish tillage farmers’ peers in other EU countries through their merchants and co-ops so why not here too?

“It has been great how Grennans have been both careful but open in exploring these tools with their growers and the growers I felt learned a lot from the experience that will stand to them in the future as we work together to try manage their price risk as best as possible. I like to think this group of farmers with price insurance were the most relaxed tillage farmers in the country heading into this harvest. They could take comfort that they were neither locked into nor exposed to low prices,” Rory concludes.

The numbers say that Irish tillage farmers miss out on thousands of euro in income each year by not optimising their grain marketing. There are many ways to improve farm incomes through risk management, and price insurance can be one of those alternatives.