November 14, 2014

Pros and cons of grain storage versus sales

While global grain prices are currently weaker than recent seasons, NAB's Greg Noonan says Australian growers are being paid a hefty premium. He's urging them to work through the pros and cons of marketing options when deciding whether to sell now or hold onto their grain.

Grain growers seeing weaker than expected global prices this harvest are being urged to work through the pros and cons of marketing options when deciding whether to sell now or hold onto their grain.

Greg Noonan, National Australia Bank’s Head of Agribusiness Markets, says while global prices are currently weaker than we’ve seen in recent seasons, Australian growers are in fact being paid a hefty premium on global prices.

“Current east coast wheat basis is at levels normally associated with severe drought conditions, due to a shortage of grain being offered for sale by producers,” Mr Noonan said.

2014/15 season milling grade wheat delivered to east coast ports is currently trading at about AUD 75 per tonne above the equivalent Chicago Soft Red Wheat futures price.

Mr Noonan said it’s also important to do the calculations and factor in the opportunity cost of holding and storing grain. “Waiting for higher prices may be tempting at this time, but you are counting on some change in the market down the track and on-farm storage can be false economy under some circumstances.

“It’s important to recognise all of the costs associated with storing grain, and acknowledge how much of an increase in price is required to cover those costs.

“In contrast, the money in your hand after harvest can be a valuable asset. You can pay down debt that you would otherwise have to carry until the stored grain is sold later in the year.

“Even with interest rates at historically low levels, an increase of about AUD 10 per tonne in price would be required to cover just the financing costs associated with holding grain for six months.”

Mr Noonan says there are few indications that the current grain price is likely to shift in the near term. “From a global grain price perspective, we’re now waiting for northern hemisphere fundamentals to begin impacting prices in their spring next year.

“A continued fall in the AUD may provide some support to local grain prices, as long as it is not offset by a fall in global wheat prices caused by a strengthening USD.

“The global market is very well supplied, so other than a further deterioration in local climatic conditions over our summer, there is no major factor on the horizon that is likely to lead to a significant price rise for Australian growers,” Mr Noonan said.

Producers looking to benefit from an increase in prices post-harvest should also consider marketing alternatives such as pools, which provide cashflow at harvest and some participation in the post-harvest market.

Important Note:

Any advice in this editorial has been prepared without taking into account your objectives, financial situation and needs. Before acting on this advice, you should consider its appropriateness to you.