Crop price insurance - Poll

[crazy_bull]

From your call to BFL it does seem a £5 premium to protect against market falling below £147 for wheat in the ground right now is available though from a broker, I expect it would be more than that if I called around some merchants now (and rightly so).

It would be £5.50-£6.50 depending on volume.

C B

 

[Brisel]

Going out-of-the-money drops the premium by roughly £2.50/t for every £1/t less on the strike price. Worth considering IMO.

 

[Dave645]

Let's not forget what happens when you sell forward and win on spot price......they find something wrong with your crop that causes deductions that reduces your final price closer to the open market how will insurance cover that, or will they blame the farmer and not pay, Because the quality is not at spec despite all your other loads going in no problem.....

I get what Clive is driving at with this insurance but how often do the nice markets offer good prices to fix in with any type of insurance, in the highest price years we have seen, the forward prices were always low you made far more selling spot, I talked to a merchant that year lots had sold large amounts forward at £110/T but the market ended up at over £200/t at no point did the forward prices offer that type of money,
The only year you would win with this is after a high prices year and the market is unsure where the market will be and offer good prices but they fall fast as the season progresses and thet see that there will be plenty of wheat about again.

Let's not forget the EU tried price support and it ended up with mountains of food in stores all over the EU.
If any scheme was worth trying it would be a govermant selling group, where farmers can sell to them and get the seasons average price, or the monthly average price, you don't get the best price but not the worst either.

The bottom line on price, if we want good prices we should not over supply the market, but I will say this the govermants of the world will not let us hold the market to ransom....we could all cut production by 10% and if that made the price jump by 10% or more it would be a no brainier to do. If only the weather was not a factor.....the world wide supply and demand figures are out their it would only take a small amount of maths to work out by what % we need to cut production if every farmer did it, to take control of the markets into our hands. Under shoot demand by 5% cause a world wide shortage, who needs insurance or sub. But we cannot as we are playing with people's lives and the govermant know it, if we aim to cut it by 5% but it's a bad weather year and it's down by 30% naturally. prices will be high but it will cause hardship and large price rises for staple foods. The govermants will soon step in if we added to the problems of shortages.

 

[crazy_bull]

From your call to BFL it does seem a £5 premium to protect against market falling below £147 for wheat in the ground right now is available though from a broker, I expect it would be more than that if I called around some merchants now (and rightly so). Thats a tempting option as a feed base price

there is little doubt that options via a merchant will cost more, as you point out you have to use the same brokers as a farmer can go to directly and of course no one would expect any merchant to provide that service and paperwork etc for free

Just re read this, the £5 option was against wheat in the shed, not in the ground (May 18).

If you do it with a merchant they will generally do it against a physical sale, i.e. You are locking into the basis against the futures on that day.

Take the £147 option, that is not £147 x farm that is £147 on the LIFFE. Depending on where you are in the country at the moment that could be £140-150x farm for feed wheat. That basis will likely change through the season, so by just doing an option via a broker without a physical sale to back it up you are still exposed to basis change.

Let's take the East midlands currently £5 below Liffe ex farm, so £142x for May 18 less your option cost of £5 would give you a minimum price ex farm of £137. In order to realise an upside to this May 18 would have to trade above £147 on the LIFFE, you then also have to decide when to lock it back out, a lot of folks just let them run to expiry, despite having a few blips up where they would have gained some extra £.

When doing it with a merchant against a physical sale, the margin would be less that a straight option trade as it would be built into the margin of the physical sale.

Hope that makes some sense.

C B

 

[An Gof]

Oh I see. Sounds good, my wheat and rape look fantastic for harvest 2018 what is Richard going to charge me to lock into today’s forward prices and leave me free to exploit any market upside before Christmas 2018?

System not expected to be live until 1st half next year. At the meeting I was attending he quantified the premium for the risk at somewhere around £3 premium per £50 risk

 

[homefarm]

£5/tonne insurance is probably value if it can be done for that. Most fungicides I use I class as insurance and cost more per tonne.

It is a cost though an extra £5/tonne before you see a profit.
I am not convinced it can be done for £5 and insurance is very expensive if the provider does not pay.
When I have looked a options they are cheap when the risk is low and expensive when the risk is high and therefore have never seen them as good value.
I can not see how this can be different. I have to have the confidence the provider will still be around when I need a payout for it to work.

 

[TOM BARCLAY]

Yes, but... unless someone is underwriting the difference between the premium cost & LIFFE/MATIF options I don't see this being that cheap. @crazy_bull is right. At the money options are around 10% of the value depending on what gets spat out of the Black-Scholes formula used to calculate put/call option costs.

The COP debate is a bit of a sideshow in a high stocks-to-use market where the chance of big price rises is slim unless currency plays ball. I've sold at a loss to hedge against the risk of a bigger loss. I get the point that you wanted to keep the question as simple as possible.

At the time of typing this you've only got 56% in favour! At least a low uptake of such a scheme would mean LIFFE illiquidity would be less of an issue

Cost of Production is always a big worry with input costs escalating...
Merchants have the most important job in farming in that they buy what the farmer produces. Merchants do sell Options to their clients and they will be more expensive. This is beacuse the merchant has to go to a FCA regulated broker to get access to the market (as they are not regulated) - Therefore the merchant has to add his margin in.
Right now Nov 2018 futures is £144.85
At the money Put - £145 costs £8.00
£143 costs £6.80
£141 costs £5.65
A Put option essentially is an insurance should the market drop - you 'exercise your option' or in easier language/terminology like insurance - you make your claim.

 

[TOM BARCLAY]

Going out-of-the-money drops the premium by roughly £2.50/t for every £1/t less on the strike price. Worth considering IMO.

Right now Nov 2018 futures is £144.85
At the money Put - £145 costs £8.00
£143 costs £6.80
£141 costs £5.65

 

[TOM BARCLAY]

it is - but the question is above YOUR cost of production and margin that leaves a profit


let's say for example £5/t today to insure you get a minimum of £150 next november ? - would you pay that insurance premium ?

Yes cost of production is going up and up and this isnt looking like it is going to change anytime soon. We farmers need to be yielding considerably more tonnes per hectare - this isnt going to happen anytime soon either. If Wheat soars to £200 then great however if it tanks to £120 what are we going to do? What is more likely?

Surely some protection for a % of our production is sensible or we wont even breakeven?

 

[TOM BARCLAY]

Yeah I used them once, I think the cost was approx £10.00 for a guaranteed £120.00 think I ended up with a final price of about £128.00 on my last load, less the £10.00 Not saying I wouldn't do it again but on my tonnage I don't have a lot to play about with so just sell a bit here and there throughout the year when I feel the price is about right.

Merchants have the most important job in farming in that they buy what the farmer produces. Merchants do sell Options to their clients and they will be more expensive. This is beacuse the merchant has to go to a FCA regulated broker to get access to the market (as they are not regulated) - Therefore the merchant has to add his margin in.
Right now Nov 2018 futures is £144.85
At the money Put - £145 costs £8.00
£143 costs £6.80
£141 costs £5.65
A Put option essentially is an insurance should the market drop - you 'exercise your option' or in easier language/terminology like insurance - you make your claim.

 

[TOM BARCLAY]

this could be a great game play by Richard Counsell of Stable to create a package that can stand on it own to feet, if the odds are crop insurance is financially supported by government in years to come post brexit ,this product being offered will become the norm/v cheap for all farmers and 'Stable' will be the front runner in this /corner the market

Totally agree. Richard is on top of his game too.

 

[TOM BARCLAY]

I think you need to flesh out your question a bit Clive. I'm not certain 'insurance' is the correct terminology to start with?

If my annual production of wheat is 2000 tonnes (ish). I pay 5 x 2000 now = £10,000. My cost of production is £130/tonne. I fix a guaranteed price of £155 today.

And this 'insurance' pays out to the tune of 2000 x £155/t if the market price is below that?

Are you trying to start some kind of business that fixes grain prices on behalf of producers by buying futures? For a small outlay, someone price fixes your crop for you?

On the face of it, I think most folk would not baulk at £5/tonne?

INDICATIVE PRICE AS OF MONDAY 16th OCTOBER, 2017
May 2018 London Wheat Futures price: £146.85
Puts:
£147 - £5.90
£145 - £4.75
£143 - £3.70

Nov 2018 London Wheat Futures price: £147.30
Puts:
£147 - £8.15
£145 - £6.95
£143 - £5.85

SCENARIO:
The current cash market price for Wheat to be delivered in May is £147 per tonne. To protect yourself from a price decline you can purchase put options which act as “insurance” against a price decline in the wheat market. To action, purchase 10 lots (1000 tonnes) May London wheat £147 put options at a premium of £5.90. (Total cost of £5,900 - £5.90 x 100 tonnes x 10 lots) The £5.90 that you have spent per tonne means that every pound the price of wheat falls below £147 then you will gain a pound, less the cost of premium. This effectively guarantees your net selling price at a minimum of £141.10 (£147 less £5.90 premium paid), whilst maintaining the full potential of an upward movement in the price of wheat.


Premium for 1000 tonnes cover = £5.90 X 100 tonnes X 10 lots = £5,900

Premium for 2000 tonnes cover = £5.90 X 100 tonnes X 20 lots = £11,800

Premium for 3000 tonnes cover = £5.90 X 100 tonnes X 30 lots = £17,700

Premium for 4000 tonnes cover = £5.90 X 100 tonnes X 40 lots = £23,600

CONCLUSION:
If you farm 1,000 acres of wheat and expect to yield 4 tonnes per acre you have a production figure of 4,000 tonnes (40 lots – each lot is 100 tonnes). Dependent on your risk appetite you may wish to protect a % of your production.

If you cover 100% with the put option:

• If by May 2018 the market falls to £120 per tonne. £27 X 100 tonnes X 40 lots = £108,000
• If by May 2018 the market rallies to £200 per tonne. Lose the premium and sell your physical as usual at the higher price

If you sell your physical at £120 per tonne with no put, your business will generate £480,000.

If you sell your physical with a put in place £588,000 less premium (£23,600) your business will generate £564,000. Difference = £84,400.

In the same way if you have either sold physical wheat on a forward basis or sold futures contracts against physical production it is also possible to buy a call option to realise any potential upward movement in the price whilst risking only the premium paid of the call option.

 

[TOM BARCLAY]

I had a presentation with a group from Richard Counsell this week. Absolutely fascinating and he really captivated the imagination of the group of farmers.
The tool he has will work for other commodities as well as cereals and oilseeds and possibly even livestock.
It looks a great way to protect a price. Yes you could sell forward but this mechanism allows you to insure a minimum price and still leave your physical crop for sale at a future date so you can benefit from any upside. Best part is that it is imple to use. Your level of risk will determine the premium, your choice, and your exposure is just the premium you pay online at the time of buying the premium. This really is one to watch.

R

I suspect that a fair number of people might find the prospect of just selling forward in any significant way to be quite daunting; there is of course a lot of trust involved when you are committing tonnages with a company for a crop yet not produced. I think I would be naturally reluctant to try to fudge with too much outside of my comfort zone, at least initially. This option does seem a bit more user-friendly though? You pay a one-off fee so your cost or loss is a known figure and have the option of not actually actioning it when the time comes (if I have understood it correctly), unlike a contract to supply which looks fairly innocuous in print form until you read the fine print on the back.

The only way it can work for the company providing the service is if they have people hedging against the futures markets, the idea of selling milk or livestock this way is intriguing, does a full blown livestock-orientated futures market exist in Europe?

I have often thought that the ability to fix your milk price for perhaps 3 years in advance might be a useful tool, but I dare say the retailers might not like it.

Derivatives and Insurance are very closely correlated. Derivatives are easy to over complicate which need to be the case. One must keep it simple.

 

[4course]

mon nov 17futures 137.80
ahdb market return north east 143.8
actual price available friday 146
somewhere in this debate I fear smoke and mirrors

 

[TOM BARCLAY]

LIFFE prices above are 16th October 2017 - no smoke or mirrors.

 

[4course]

LIFFE prices above are 16th October 2017 - no smoke or mirrors.

so please advise, where do I go for todays similar price ,I used the price from ahdb market returns 9th nov and the current price shown on futures and the price on the contract I have in front of me for grain sold last week or is it even worse than i fear that the ahdb prices we all pay for are worthless

 

[Brisel]

LIFFE prices are freely available to anyone, anywhere. What you can sell for depends on bids & offers. Where is it going to? Haulage rates? Merchant margin? AHDB returns are out of date before they are published. They are only an average.

 

[TOM BARCLAY]

of course - http://data.theice.com/MyAccount/Registration.aspx

 

[crazy_bull]

so please advise, where do I go for todays similar price ,I used the price from ahdb market returns 9th nov and the current price shown on futures and the price on the contract I have in front of me for grain sold last week or is it even worse than i fear that the ahdb prices we all pay for are worthless

that was what i was getting at, big variance accross the country with regards basis vs LIFFE, in Kent i think it is trading £7-8 below LIFFE up your way it has traded up to that amount over LIFFE

by linking the option with a physical sale you are securing that basis.

C B

 

[4course]

that was what i was getting at, big variance accross the country with regards basis vs LIFFE, in Kent i think it is trading £7-8 below LIFFE up your way it has traded up to that amount over LIFFE

by linking the option with a physical sale you are securing that basis.

C B

thats my point liffe futures close to hand bear little resmblance i.e 5% adrift either up or down depending where you are which is or can be more than the cost of options/insurance