Good reason for optimism, but high prices bring greater risks

HIGH international agricultural commodity prices are giving Australian farmers good reason to be optimistic about 2008, however failure to adequately manage rising input costs could erode their ability to capitalise on improved conditions, according to the latest results from the Westpac-NFF Commodity Index.
The Index recorded a fresh 20-year high in global agricultural prices this month – surging 25.7% above the same period last year – but mounting input costs, and rising volatility in output prices, mean Australian farmers must exercise caution and apply solid risk management practices to ensure a rebound from drought.
According to Westpac Senior Agribusiness Economist, Justin Smirk, in this environment it is more important than ever that farmers find a way to balance production, cost and price risks.
“Now is the time to talk to your agronomist, consultant, accountant, financier and banker on how to manage those risks. The 10% fall in global wheat prices over the last few days is a reminder that trying to pick the top of a market is speculation, not hedging,” Mr Smirk said.
“For those that remember the last time we saw a record high in global wheat prices – 1996 – it was a savage lesson in volatility. Wheat prices doubled in the year to April 1996 only to fall 40% in next 12 months with all the gains being unwound by 1999. Back then, it was a 10% rise in global wheat production that crushed the market. So while we are not expecting such a large rise in wheat production this time, history suggests it would be foolish not to consider the possibility of such event.”
This sentiment, and advice to err on the side of caution, is echoed by National Farmers’ Federation (NFF) Vice-President Charles Burke: “Over the past year, fertiliser and chemical costs have more than doubled, wage rates have spiked higher and fuel prices have quadrupled since 2003 as robust demand, both global and domestic, stretch economic capacity to the limits.”
“Australian farmers face a delicate balancing act – weighing up soaring global commodity prices and the need to earn solid income to get back on their feet, against making doubly sure their actual productive capacity can meet forward contracts.
“Last year’s winter crop saw many farmers fail to meet contract targets which saw them plunge into deeper debt after poorer than expected yields – farmers must be cautious and make realistic production estimates and not get carried away by the potential offerings of strong commodity prices.”
Mr Smirk noted: “Record prices are quite naturally presenting farmers with a unique opportunity to capitalise on any rainfall. And while we remain optimistic about the longer term outlook, we caution that volatility increases as prices rise.”
Compared with January 2008 levels, global prices in February increased for Barley (0.7%), Beef (1.2%), Sugar (8.6%), Wheat (10.1%) and Canola (13.1%), with Cotton (-0.9%), Dairy (-2.8%) and Wool (-4.4%) experiencing a decrease in price from previous month levels. The overall weighted index increased by 2.5% during February, taking it to 25.7% above year-ago levels.
[ENDS] The Westpac-NFF Commodity Index is weighted according to the value of Australian agricultural exports and includes only rural commodities – unlike other price indices that are overshadowed by oil, mineral and energy prices. It provides daily movements based on prices of Australia’s eight key farm exports – wheat, barley, beef, wool, cotton, sugar, dairy and canola – in both $US and $A.