Business risks associated with rapidly rising commodity prices are increasing as businesses of all types look to banks for higher borrowing limits.
Margin calls to support futures positions weigh heavily on trade cash flow.
These require additional cash to be paid into a futures account to cover losses when the market moves against your position.
Some grain buyers have refused to give prices for the new crop because of the risk of volatility or their inability to be sure they can access working capital to finance the trade.
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In addition to the sharp increase in commodity prices over the past three weeks, on top of earlier relatively high levels, freight and transportation costs have increased significantly, and the disruption of some supply chains caused by the Russian action in Ukraine complicated the logistics.
Watch out for late payments
All of this puts pressure on companies that buy and supply farmers. People concerned about payment should watch for any changes in the way their clients work, such as late payments or apologies, the consultants warn.
While a producer who has a good relationship with a grain buyer might be able to arrange advance payment at, say, 14 days instead of waiting the usual 28 days after collection, the same trader would be very little likely to take such a risk with a new farmer-supplier, said a domestic grain buyer.
Prepayment demands would also add pressure on the buyer’s cash flow.
At Cefetra, agricultural grain origins manager Simon Wilcox said the extreme volatility made it difficult to be a grain trader.
“We continue to offer prices for all products (both old and new crop), but prices must be agreed at the time the contract is concluded over the phone,” he said. .
As well as carefully seeking the security of their buyer, farmers could reduce risk by spreading their contracts over several months so they are not dependent on a large sum arriving in a month, Wilcox suggested.
He said there was very little uncommitted old crop grain left on the farm, and big sales had been made earlier this week.
New crop sales
Regarding new crop feed wheat, he estimated that producers had sold between 10% and 30% of the 2022 crop, a slightly higher proportion than had been the case in recent years, even though all were cautious about overselling, especially at these high prices.
Mark Aitchison, managing director of Frontier Agriculture, said risk in the market had increased significantly, putting significant pressure on traders’ working capital.
In addition to checking the accounts and, in particular, the balance sheets of potential buyers, he suggested considering the range of outlets for a client and whether a company was investing.
“One way to mitigate risk would be to sell into the spot market instead of selling far,” he said. This way, although the best potential price might not be reached, the risk would be short term.
At Tyneside Co-op GrainCo, Managing Director Gary Bright reiterated caution on trading partners: “Current market movements will test all businesses, large and small, as cash flow stretch with margin calls and rising prices,” he said.
“We are well resourced and backed and have 65% cash on fixed assets and no pensions to worry about – other companies may have a strong balance sheet at first glance, but the first look doesn’t always tell the whole story. “
Mr. Bright gave as an example the grain company Alexander Inglis & Son, now in administration, whose accounts had shown a seemingly strong balance sheet.
In addition to the security of trading partners buying and selling to farmers, there are concerns about whether contracted goods and services will be delivered, as supply chains are disrupted and the risk of force majeure is present.