Anecdotally, the 2015/16 season unsold grain estimates have been quoted as high as 25% – 30% state wide, which equates to around 3.7MMT. Add this to the increasing potential of new season production plus estimates of 2 MMT carry out from October 2016 and it plays right into the hand of the trade. Lots of supply, not much demand, hello Economics 101 !
This season we have seen a reduction in the number of forced sellers, ie; growers having to sell grain to realise income to pay down debt or bills. This is great news for agriculture, as the financial health is rebounding. However, do not become complacent. We have seen the market come off close to $40/t since the peaks during harvest. Not selling because you have your cash flow under control or not selling to reduce tax is potentially going to cost you more in the long run. It is not a plan.
For example, back in the middle of January you could have sold APW1 in Kwinana at $295/t. You did not sell because
1) It was not $300/t or
2) You did not need income in this financial year.
The tax saving equation is different for all businesses. However, you do need to consider the opportunity cost of both the target $300/t and the tax decisions. At the end of April, the Kwinana port price for APW1 was $275/t. This is a difference of $25/t. Would the savings you would have made from your tax be worth $25/t?
This is certainly a question you need to discuss with your accountant as early as possible after harvest.
Prices have now moved up $10-$15/t into mid-May which is certainly positive. This is due to a shortage of APW1 (strange I know) in the Kwinana zone and a couple of buyers requiring this grade for shipping before the end of June. They are actually paying less for deferred delivery and payment in July. Again this is something to consider when setting targets. The $AUD downward movement in the last month has also certainly helped this increase in cash pricing.
Do not rely on shipping slot shorts now or into the near future to give the market a $10 to $15/t spike, as seen in previous years prior to the introduction of the Long Term shipping Agreements (LTA’s). These spikes will not happen. You need to start thinking in terms of where the market really is at the moment. It is under pressure and upside from here will be limited.
Income deferral scenario:
Post-harvest (December – January), your accountant advised all remaining grain income needs to be deferred until July. Firstly, be certain your accountant makes you aware of your accounting selection – Cash or Accrual and secondly, that grain sales to date have satisfied all cash flow requirements. Whilst currently you may not be a forced market seller, this doesn’t mean simply pricing the grain in July.
- What is your $/t saving by deferring tax? It may not be as much as you think.
- Cost of holding grain. What is the opportunity lost!
When looking at this chart in Figure 1, ask yourself – what is going to push prices back to above January levels? The $AUD or buyer demand? We don’t know what the $AUD will do but we can assume buyers have plenty of most grain grades to source.
It’s now time to review unsold grain target levels, in line with your average $/t grain sales to date and to bring them to realistic market levels. Given how market levels tracked last year, 50th percentile $/t average results are only achievable if you have had a good plan in place from early 2015. Be aware of where grades have peaked since January and also consider the differentials between zones.
And then there is 1617 season pricing to consider at all times too!
Figure 1; Best daily APW1 price all zones (Jan to May 2016)
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