Arable farmers enter the 2023 season with some trepidation. Input costs have risen 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 arable farms are not a new phenomenon, the new reality is that the cost of growing an acre of crops is so high that the financial consequences of a poor harvest are greater than ever.
Variable costs could increase by up to 65 percent for winter wheat in 2023 compared to 2021. A comparison figure for summer beans is estimated to be much lower at 21 percent, reflecting the impact of high fertilizer prices.
Fertilizer is the real bogeyman. The high grain price seasons of 2021 and 2022 were very profitable for arable farmers with low fertilizer costs in 2021, and while fertilizer was expensive in 2022, many arable farmers had negotiated prices before the big increases. In 2023, however, everyone is starting from the same point.
While fertilizers are the main reason for higher costs, they are not alone. We have already seen that seed costs have increased by 150 €/t, chemicals are expected to increase by 10 percent and operating costs for machinery have also increased.
Is Forward Selling the Ultimate Risk Management Tool? Grain forward sales can play a role in minimizing arable farmers’ financial risk, particularly during periods of inflated input costs. Most major grain buyers offer forward selling options to their customers, but adoption is still relatively low.
The majority of farmers wait until harvest and risk it, but this is fraught with danger. We are now in a period of high grain prices, but it is difficult to predict how long this will last.
Most growers received more than €300/t for the price of green barley at 20% moisture this crop; the 10-year average is €172/t.
Understandably, every farmer wants to sell at the top of the market, but perhaps selling a portion of the expected crop at a profitable price is wiser than going broke at the harvest. Selling little and often works better than betting on getting the highest prices.
We have to be realistic about the yield and only sell part of the harvest. Working with the five year average yield for a crop on the farm is a more reasonable approach than an expected yield.
Many growers will remember 2012 when a bumper crop in June was probably only wiped out by one of the worst periods of harvest weather in modern times, resulting in many growers being unable to deliver the contracted tonnage of forward grain .
Fertilizers could account for more than 65 percent of the total material cost of grain this year, so selling grain and buying fertilizer at the same time can hedge fertilizer costs once the crop turns positive at these prices.
In order to be able to sell forward, we need to know our costs. A crop budget is essential. Determining the cost of materials is a relatively simple process, but machinery is difficult and very important, as machinery can account for up to half of the total cost.
It is worth spending some time with your consultant or accountant as Teagasc experience shows that machine costs vary more than material costs depending on the operation. Contractor prices are a useful guide but may not reflect the machine profile on the farm.
When nights are falling and field work is slacking, there is no better time to review the farm’s financial situation and invest in risk management.
As IBM’s Gary Cohn famously said, “If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.”
Ciaran Collins is a Teagasc Plant Specialist based in Midleton, Co Cork
https://www.independent.ie/business/farming/tillage/in-order-to-forward-sell-grain-we-must-know-our-costs-42118159.html In order to resell grain, we need to know our cost