Could wet weather nurture grain options in the UK?
While growers in the European Union's third-ranked wheat
producer have become increasingly aware of futures as a way of guaranteeing
prices by selling ahead, options have yet to catch on in a big way.
"Very few farmers use them," Jack Watts at the UK's HGCA
crop bureau said.
"They are largely put off by the complications involved in
them," especially in the UK's tight financial services regime.
"The uptake has been relatively minimal among farmers," proving
more common among larger enterprises such as mills and feed groups further
alone the value chain.
However, the dismal weather taxing UK farmers certainly makes
a case for using options, which allow farmers to sell crop in advance but, unlike
futures, do not oblige a sale.
London futures are offering farmers, at £187.50 a tonne for the
November 2013 contract, tempting prices for their next wheat crop. The price
compares to figures below £145 a tonne for the November 2012 contract a year
But growers have been reluctant to lock-in such high values
because of the slow progress on sowings, which are running well behind the
normal pace, as Agrimoney.com reported last week, leaving many to worry that
they may have very little crop to sell next year.
Cumulative trading volumes for the November 2013 contract, from all sources, are running some 40% behind those a year ago, with a grain trader telling Agrimoney that sales from producers have slowed "to a trickle".
In theory, options allow farmers a way of locking in high
values with lumbering themselves with the responsibility to deliver.
Popular in the US
Certainly, options are popular with US growers.
"Over the last 15 years, producers have become much more
astute in their marketing strategies, including options," Jason Roose at broker
US Commodities said, estimating that 50-60% employ some form of hedging.
"And more use options than futures," given their
Indeed, at Linn Group, Roy Huckabay, a principle at the Chicago-based
company, flagged strategies including both put options, which protect against
price falls, and call options, which allow growers to benefit more from price
Nor was the US crop insurance programme a substitute, with "very
few people" taking this protection neat rather than enhancing its flexibility
through an options strategy.
'Liquidity is very
However, there are fair reasons why UK growers are more sceptical
– not least because the London options market is far less liquid than its Chicago
counterpart, besides a reluctance to pay the upfront charge.
For UK feed wheat, at-the-money options – with a strike
price at the current futures prices – for November 2013 can in theory be bought
for £20 a tonne, locking in next year's high price.
"But they may be difficult to as liquidity in the market is
very thin", Mr Watts said, suggesting buying better-traded options against
Paris-traded milling wheat as a proxy.
"To reduce the cost, an out-of-the-money option can be used,"
with a saving of some £8 a tonne gained for an option E10 a tonne away from the
A UK grain trader said: "It's an interesting idea. But it
introduces currency risk into the mix as well as the different dynamics of the
feed and milling wheat markets."
Not that options were a no hoper in the UK.
"It is to some extent a cultural thing. Farmers used to be
reluctant to take out protection for sterling against the euro," the currency
to which European subsidy payouts are pegged, "which went on to become popular."
'Most options expire
Still, it is not all upside for options, as Jerry Gidel at US
broker Rice Dairy said.
"There is the cost involved," in terms of the cost of the position
and the margin on maintaining it.
"And they do say that most options expire worthless, and
that the people who make money from options are the people who sell them, not
In the UK, many growers opt for minimum price contracts with
merchants, which in essence see the merchant sell a futures contract and
repackage it to the producer.
"That is a simple way for farmers to deal with what can be a
sophisticated concept," Mr Watts said.