Precision Area Contracts Forward returns without the risk

Driving on the outskirts of Coolamon NSW, Royston Moncrieff tells me he’s a fourth-generation farmer who’s been working the land for almost 30 years. He says the satisfaction of seeing the end result of his hard work at harvest is what keeps him in farming. Talking about the current season and his use of precision agriculture, Royston says he’s begun working with Delta Ag Precision Ag agronomist Dan Rigney to build up a picture of his crop using satellite imagery. The images taken throughout the season over a number of years will build an accurate picture of crop performance. The end game is the targeted application of fertilizer and lime at the rate that gets the most out of the crop. “It’s only in the first year so we need a few more seasons to get the best picture of how the crop performs,” Royston admits. However, he’s hopeful that through his new grain marketing strategy and other precision agriculture practices, he’ll reap the rewards of an increased return. Royston has used warehousing as his main grain marketing tool for several years, so that he has the flexibility to cash out the crop as the year progresses or when the price improves. This year, in addition to this strategy, he’s taken out Precision Area Contracts (PACs) on small parcels of his wheat and canola crop to see how they perform. It was in 2016, Discovery Ag (a subsidiary of Delta Ag) launched PACs giving growers a marketing option that captures a forward price without the risk of a washout fee should the crop not live up to expectations. It’s been a dream contract for growers to be able to take advantage of good prices early in the season, without the risk of a nasty washout should the crop fail to materialise.

Discovery Ag came up with an idea to capture the information available from new technology and big data that would allow the buyer to understand crop development and in turn manage risk. GrainCorp saw the potential in the quality of the data, and PACs are now in their first full season. Delta Grain General Manager, Mick Parry explains how the product was developed and how it can help the grower achieve improved on-farm returns over the long-term. “John Pattinson from Discovery Ag saw an opportunity to take better advantage of the information that was becoming available in respect to crop health, yield mapping, satellite imagery, moisture probes and yield forecasting technology to create a product that would appeal to both the grower and the buyer,” Mick says. The refinement process required an understanding of what reporting was needed for the buyer to be confident in the product. This wasn’t something developed overnight, but instead meant Delta Grain, Discovery Ag and the GrainCorp marketing team came together to agree on the detail. The end result is a product that’s attractive to both the growers and the buyer. When it comes to forward price contracts, the benefit of being able to lock in a price outside of harvest (when prices are traditionally lower) is appealing, however, in an uncertain season they come with a level of risk. That risk is not being able to deliver the required tonnage, or quality specifications should your harvest not go the way that’s expected. When this happens, you’re left with a hefty washout fee as you have to pay the difference between the contract price and the cash price at time of delivery.

“PACs commit the grower to an area of their farm with no minimum or maximum tonnage required,” Mick says. “A grower can choose how much area to commit, but it makes sense to break it up into paddocks committed, with a minimum of 100 hectares.” The attractiveness of being able to forecast how a crop will perform helps the buyer hedge and manage price risk. The uncertain is made certain with the combination of crop data from the previous five years provided by the grower, satellite imagery, weather information and yield monitor data. “This information, along with the monthly report we provide with crop satellite imagery, means the buyer has the certainty they need to hedge and/or sell to their customers.” Mick says. With the memory of a canola forward contract that he was not able to deliver against due to a poor season still in his mind, Royston says he was reluctant to sign up to forward contracts again. “The season was good when we signed up, but then went bad later on (in the season), we didn’t produce what we thought and we had to pay out a washout fee,” he says. But with the no washout fee, Royston says he is comfortable with using PACs, explaining he could produce one tonne or 1,000 tonnes and he will still get the price agreed without penalty for not delivering a committed tonnage.

Saying it’s still early days to fully appreciate the product, Royston tells me that other growers also share his enthusiasm for the product’s no washout fees. Although fixed tonne contracts trade at $10 to $15/tonne premium to PAC contracts, the lower risk more than makes up for it. Part of the calculation of the PACs price, Royston explains, is using the grower’s past yield history and data. Royston calculates the price he needs to get in order to achieve his targeted return. When it hits that price, he contacts Delta Grain and locks it in. With the contract established, the rest is fairly simple because the collection of monthly crop data that is sent to the buyer is done by Discovery Ag and the agronomists who work with Royston throughout the year. He says as he’s built up a relationship with them he is confident they report accurately. Mick says the growers who’ve shown the most interest are on marginal country where production is more uncertain. Uptake this year, however, has been slow and he put that down to a difficult start to the season with low grain prices earlier this year. “We didn’t want growers to sign up to PACs when the prices were low, that would be a bad outcome for them. Once the prices picked up we started to engage more and we saw some growers lock in some prices they were really happy with,” Mick explains. Part of the analysis was to look at the grain price over the last nine years. Mick and John Pattinson discovered that seven out of the last nine years APW1 traded above $300 delivered port, when the long-term average was $282. The difference between the higher price and long-term average represented an opportunity that growers using PACs could secure. “Selling an area of your farm for $40 (for example) above the long-term average in seven out of nine years will make a major difference to on-farm returns,” Mick reflects on the opportunity for growers. Under PACs, during harvest, all grain produced within the area committed must be sold to GrainCorp via Delta Grain Marketing. Pointing out that the product is a new one he’ll consider them earlier in the season next year (when he expects prices are good), Royston expects he will keep using PACs into the future. For more information on how Precision Area Contracts can be part of your marketing mix, or to obtain today’s price get in contact with your local Delta Ag grain marketing broker. http://www.deltaagribusiness.com.au/grain