While growing grain in WA is always a risky business, especially so this year, with the drought cutting yields and locusts threatening to cut a swathe through crops, growers also remain unsure of how best to maximise returns.
This year, perhaps more so than most, every dollar counts and due to the current volatile grain trading environment, growers are exploring non-traditional grain trading mediums.
But they need to ensure they choose the right level of risk for their individual enterprises, according to University of Western Australia (UWA) Agricultural Science graduate, Trent Smoker of Corrigin, who explored risk and how growers can use it to their benefit in his honours thesis.
The Grains Research and Development Corporation, Co-operative Bulk Handling and Great Southern Development Commission scholarship recipient was recently back home on the farm, ‘Barclay’, a 4000 hectare grain and sheep enterprise after completing his fourth year project through the School of Agricultural and Resource Economics at UWA.
“Quite a few local growers asked me what they should do with their grain and I told them it simply comes down to the level of risk their business can handle.
“The take-home message for all growers is ‘to not put all their grain in the one bin’.
“And the best way to manage risk is through diversifying marketing strategies by investing grain in pools, optimal futures, forward contracts and cash at delivery.
“However, growers need to look at how risk and price volatility will influence them and determine a market strategy that best suits their business,” Mr Smoker said.
“If risk is not a problem, they should target high risk and potentially lucrative high return futures portfolios.”
Mr Smoker added that growers could maximise returns with high risk investment strategies, but volatility was high.
“The high risk portfolio has a total production split between the two assets, AWB national pool and optimal futures and produces the highest return.
“The alternative to the high risk portfolio is the low risk, which is very diverse and concentrates on low risk and low return assets,” he explained.
Mr Smoker said that the low risk portfolio, although highly diverse, is significantly biased towards forward contracts.
“A large amount still remains in the national pool, while the cash at delivery and futures options have between four and six per cent of total investments.
“It’s important to diversify the low risk portfolio’s investments to spread price risk and guarantee returns. This demonstrates diversification’s effectiveness in significantly reducing price risk.”
Mr Smoker, who thoroughly examined the economic scenarios of growers from Kulin, Wandering and Watheroo and two from Corrigin to calculate business risk, plans to apply the knowledge and experience he gained during his training at UWA on his farm.
Professor Kadambot Siddique, Telephone (+61 8) 6488 7012, Mobile 0411 155 396
Mr Trent Smoker, Mobile 0427 906 371