Analyst Insight: Budgeting, why now and how can this benefit us?

Thursday, 3 June 2021

Market commentary

  • London feed wheat futures (Nov-21) fell £2.40/t yesterday, to close at £176.60/t. This fall follows similar falls globally, on the Paris wheat and Chicago wheat and maize markets.
  • Following gains of $10.47/t on Tuesday, Chicago Nov-21 wheat prices were the highest since 14 May. These gains were due to dry US weather in spring wheat areas and further Brazilian maize crop cuts. Yesterday, a mixture of possible demand rationing in the US and positive crop condition scores for US maize, dampened wheat prices marginally.
  • Chicago soyabean futures (Nov-21) gained $6.15/t yesterday to close at $519.41/t: the highest point in three weeks. Gains were made on dry US and South American weather. Brazil’s water crisis is reducing river levels and making soyabean exports harder.
  • Vegetable oil prices found strength from higher biofuel demand. Plus, India is said to be considering reducing its import tax due to record cooking oil prices (Refinitiv).
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Megan Hesketh

Senior Analyst – Arable

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Budgeting, why now and how can this benefit us?

Why now is a good time to start

Budgeting is a useful tool when growing grains and oilseeds. Calculating costs of production by tonne by crop type can help you understand at what price your crop could make a profit, and so help manage your cashflow. Perhaps the most important question is, why start now?

The 2021/22 season crops are around three quarters of the way through their growing season. With this in mind, here are two reasons why now is an ideal time to budget:

  1. A high proportion of production costs have now been spent for most people. So, both fixed costs and variable costs can be accurately forecasted. Input costs may include fertilisers and pesticides purchased and often already applied, plus fuel stored in the tank. With this information, we can accurately estimate 2021 costs by crop type. It is important to record variable costs (including input costs) by crop type, as there can be large variation based by crop.

 

  1. You will have a good idea of your crop conditions. This could be through plant counts, identifying disease, or drawing on past weather i.e. too much or too little rain. Future weather is impossible to predict, and so this is caveated. But, using experience and tools, many farmers can estimate their crop’s potential average yield for harvest 2021. The added benefit of budgeting now, is yields can be more accurately forecasted than for example three months ago.

 

2021 budget – where to start

Farmbench can help you create a budget. It’s an online benchmarking tool, with a goal of improving farm efficiency. The tool is designed to compare your business’ figures against similar businesses, helping you to create your budget. There’s more information on using Farmbench in this guide, which also details contacts of our Knowledge Exchange Managers.

 

What can we achieve from budgeting?

Knowing your costs and yield guestimates puts you in a position to estimate costs of production by tonne. With this information, you can produce sensitivity analysis on different yield and tonnage scenarios. This can help you understand what market price is needed for your crop to earn profit.

Markets are currently volatile, which makes it especially important to understand what’s a ‘good price’.

Looking to new season crop markets, global fundamentals continue to drive price gains, with weather a key factor. This week, global grain prices gained due to US dry weather, Brazilian crop cuts and technical trading.

Market reactions to news have been arguably more sensitively recently, due to low US stocks. This volatility could continue as we head towards harvest, and is something to consider as part of your marketing strategy.

Budgeting and knowing your costs of production per tonne can help to manage price risk, ahead of the new season. Consider where your costs of production per tonne sits with current Nov-21 prices, alongside potential future price direction.

 

Grain marketing

Marketing strategies can help mitigate price volatility in grain and oilseed markets. We talked more about strategies in our Spring Market Outlook and Alex wrote about using option contracts here. Selling forward and futures contracts can be effective tools for some people. Alex looked at selling forward here.

Something that’s important to consider when taking on a marketing plan, is your attitude to risk and the vulnerability of the business position. For example, do you need to lock in a certain tonnage at current prices? Or, are you in a position to chance the market closer to new season?

Managing risk is especially important when considering life after changes to support schemes and the volatility seen recently in global grains and oilseed prices. For example, in England 2021 is the first-year basic payment scheme payments will see a decline and you can use this tool to look at the impact on your business. Managing price and business risk going forward starts with knowing your costs of production.


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