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National Australia Bank's Commodity Watch: Cost of Production Critical

16 November 2012

AUSTRALIA - Australian farmers are experiencing price volatility (of around $100 per tonne in recent months) following a significant dry spell in the US Midwest. So, how can they adopt hedging strategies to capitalise on the increased demand for Aussie exports following the drought plight in the northern hemisphere?

The first thing Australian farmers must get their head around, explains NAB’s Head of Agribusiness of Business Markets, Rod Fraser, is their cost of production and the margin they intend to manage.

“Currently, markets offer growers the opportunity to protect much healthier margins than seen in the past 18 months,” he points out, “and it remains critical to maintain a close eye on production and only hedge a percentage of anticipated production that suits your risk appetite.”

Also be aware of why price hikes are likely to occur, he adds. The current slump in US yields of corn and soybean will generate a rally in these crops and this, in turn, will drive the prices of wheat, barley and canola prices – Australia’s major winter crops.

But don’t go overboard in setting long margins when prices go north: keep the risk in check when hedging. “It’s important to not get bullish at historical highs and recognise that current prices offer the chance to manage margins well in excess of long-term averages,” cautions Fraser.

“A scale in strategy to the rally avoids missing the opportunity when the market starts rationing demand and price erodes.” For example, with prices well above $300 AUD per tonne, opportunities exist now to start managing margins for the 2013-2014 season.

Yields, cost variability and equity levels in land and machinery affect a farmer’s ability to hedge, as they all impact the cost of growing one tonne of each commodity. Growers need to understand this and then target a margin above that cost of production, says Fraser.

What’s more, growers need to get into the habit of updating their yield forecast every seven days. “It’s imperative Australian producers monitor yields on a weekly basis,” Fraser cautions. “Our variable climate adds significant risk for producers and it’s essential they don’t get into the situation where they’re oversold in an explosive market.”

TheCropSite News Desk

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