FARMLANDS GRAIN (N.Z.) SOCIETY LTD - A Marketing Audit, 1980 -84
Dr R G Lattimore
Views expressed in Agricultural Economics Research Unit Discussion Papers are those of the authors and do not necessarily reflect the views of the Director, other members of the staff, or members of the
Revie~~ Committee and Management Committees.
Discussion Paper No. 104
Agricultural &Economics Research Unit Li nco1n College
List of Tables
List of Fi gures Executive Summary Acknowledgements Section
(i) (i ii)
1 The Commercial Operating Environment 1980-84 1
Fann Contracts and Inventory Control Grai n Marketi ng
Performance and Operations, 1980-84
Foreign Exchange Operations Barley Pool Returns
4.1 4.2 4.3 4.4 4.5
World Grain Market
New Zealand Agricultural Opportunities
Tenns and Conditions iVlarkets
Timing of Sales
Market Share of NZ Barley Exports Export Barley Pricing
Administrative and Marketing Costs
1 1 3 5 7 11 11 11 11 12 15 19 23 23 26
1 2 3 4 5 6 7 8
9 10 11
LIST OF TABLES
Barley i1arketing, 1981-84 (Feed and Malting) Export Barley Arrangements
Distribution of Sales over Crop Year
Total New Zealand Exponents Unmilled Barley, Quantity Unite Value, Destination, 1981-85
South Island Barley Society Export Price Premiums (+)
or Discounts (-) over World Harket Indicators Foreign Exchange Exposures on Barley 1981-82 Forward Excnange Rates ($US/$NZ)
Estimated Comparitive Net Farmer Returns by Marketing Agents, Barley, 1982-85
Barley Pool Payments, 1981-85, Farmlands Grain Barley Pool Payments, Other Floating Price Pools Administration and Marketing Costs to FOB
16 20 22 23 24 25 26
1 2 3 4
LIST OF FIGURES
Long Term World Grain Prices Malting Premium
Exporting Price Relatives, Malting Barley Export Price Relatives, Feed Barley
Page 2 4 17 18
On July 31, 1985, Farmlands Grain New Zealand Society Ltd engaged the Agricultural Economics Research Unit at Lincoln College to conduct an audit of the marketing and administrative performance of the Society for the four pool years, 1981-85 inclusive. The AERU was given full access to all records of the Society.
Given the growth of the Society, a number of its operational systems are continuing to evolve rapidly. Some suggestions made in this report are already being adopted. Other suggestions and criticisms need to be viewed in the context of this rapidly evolving organisation.
It was wise and indeed fortunate to establish the South Island Barley Society Ltd in the Spring of 1980. This buoyant period of wor"ld market demand for coarse grains from non-traditional sources enabled the Society to establish itself firmly in the market. Since that time, the Society has continued to perform at a very high level in a volatile external operating environment, both at home and overseas. The Society has managed its grain marketing operations energetically with a high degree of effort in export marketing. The Society has established a major ne~i New Zealand export product (Triumph ~1alting Barley). This achievement may be one of the greatest export marketing efforts of the last five years. The risk management procedures of the Society have been prudent and operated in a measured, systematic fashion.
This has resulted in significantly higher pool returns to farmer clients over the four year period 1981-85. There is every indication that the Society can maintain and even enhance its market leadership position in the future.
There is of course, room for some improvement in certain areas.
The reporting of management and marketing performance to clients (current and potential) is weak. In one sense the high performance level of the Society has been obvious through pool returns but until very recently, little appears to have been done to explain the source of this performance. It is recommended that the Society produce a management report each year to complement the financial reporting system.
With the rapid developments in financial markets and policy changes in New Zealand, risk management may require increased attention in the future. Increased attention may need to be devoted to establishing longer term marketing arrangements and early sales in the August-November period. Furthermore, a daily system of monitoring the exposure of each pool (and the Society overall) to price, currency and farm contract risk is required for operational purposes. This comment need not be interpreted as a criticism of past performance because most export enterprises are in the same position in New Zealand as a result of the changed exchange rate policy, the opening of futures markets and the removal of a wide array of financial regulations.
PREFACE AND ACKNOWLEDGEMENTS
One of the key ingredients in maintaining a viable farm marketing system is information. When farmers understand and can monitor the marketing systems they use, there is a build-up of confidence which creates a production and marketing environment that enables an industry to grow.
One way to assist in this process is for the industry to regularly publish (or have published) an independent assessment of its marketi ng performance. Thi s assessment or marketi ng audit is a valuable adjunct to the accounting audit which examines the financial integrity of the industry or the firms operations. This is especially important for firms of a co-operative nature.
The AERU was keen to publish this marketing audit to increase the market infonnation base. Farmland Grain (NZ) Society Ltd kindly agreed because pUblication is expected to help in understanding the opportunities and problems associated with grain marketing from New Zealand.
The marketing audit is somewhat tentative because Farmlands is a young firm without a highly developed historical base to draw on.
This report is also edited to exclude some sensitive commercial infonnation that any firm would wish to remain confidential.
We are indebted to the Directors of Farmlands Grain for their permission to publish and to the management of the Society for their assistance and tolerance throughout. We are also grateful to Mrs Rosemary Searle, Messrs Peter Grundy and Peter Cosgriff at Lincoln College for computational assistance, typing and advice. Finally the author received valuable assistance from executives of a number of other grain marketing agencies in Canterbury.
J.G. Pryde DIRECTOR
THE COMMERCIAL OPERATING ENVIRONMENT, 1980-85
Fannlands Grain New Zealand Society Ltd is in its sixth year of operations as a producer owned and controlled grain marketing company based in Ashburton. Until 1985, the Society traded under the name of tne South Island Barley Society. Since its first year of operations surrounding tne 1981 harvest it has increased its throughput more than four-fold with another major increase expected in 1986.
This marketing audit of the Society is designed to assess the level of perfonnance of the Society in marketing grain on behalf of producers.
The aDjective of this introductory section is to set the scene for the evaluation which is to follow by describing particularly the external environment which surrounded the inception and evolution of the Soci ety.
1.2 World Grain Market
The decade of the 1970's saw a marked expansion in the size of the viOrld grain market. On the demand side, there was a virtual explosion in grain usage for direct human consumption and animal feeding particularly in the developing world and Eastern Bloc countries. On the supply side tne United States, Argentina, Australia and Canada all increased exports markedly.
Over this period two changes in world trading patterns are discernible. In 1972 there began a rapid rise in international trade and prices of grain that continued for eight years in current, but not real, pri ce terms. Thi s l-lri ce movement can be seen in Fi gure 1 where the price of US maize, c.i.f., Rotterdillo rose from US$57/tonne in 1971/72 to US$145/tonne three years later. World exports continued to grow throughout the decade until the 1980/81 crop year. Since 1981 world trade in coarse grains (including barley) has been on the decline. In large part, this decline is due to the changing nature of the US grain sector, a strong US dollar over the period 1980-84 and the aftermath of the 1980 grain embargo.
In January 1980, the US announced a partial embargo of grain sales to the USSR. The embargo was supported by tne EEC, Canada and Australia and New Zealand and it caused major price disruptions in world markets. Grain available for shipment to the USSR was able to capture a large premium over other grain. In the coarse grain market, feed barley rose in value vis a vis maize and even developed a premium for a time.
The of 1980 the grain prices and at their
partial embargo was lifted in March 1981 but in the Spring South Island Barley Society had been established. Coarse were a their highest levels ever, in nominal US$ terms, highest level for four years in real US$ terms, Figure 1.
270-.J ., 1 240"';
LONG TER~1 vVORLD GRAIN PRICES
constant doll ars
current doll ars
90-: / '
6011t ,nTI1TTrrrn '1"tT1
~yTrT' rn,rTfT'TIr tTIT" ;ITnl'1'n , r n I'lltotnT' I'1I'llrn'T,II fT"rrrn1 ,rr'TTf IliTTYT",nlTT TTl fTT11Tn",rn[ ' " ' T ' " ,I 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
The Society wisely sold feed barley early (December 1980) at an f.o.b. price. US$34/tonne above the US maize export price and US$15/tonne above the c.i.f. price of US maize in Rotterdam.
As world trade has weakened since 1981. prices have continued to be volatile. The competitive positions of individual exporting countries has waxed and waned depending on Government support, inventory policies and exchange rate changes.
1.3 New Zealand Agricultural Opportunities
While world market opportunities for grain and oil seeds expanded rapidly during the 1970's. NZ's opportunities for traditional pastoral exports were tending to deteriorate. Towards the end of the decade, Government attempted to support the declining fortunes and made selective moves to bolster the incomes of pastoral farmers. Over this whole period since 1974, the NZ$/US$ exchange rate was declining. Even so, the exchange rate was increasingly overvalued throughout the early 1980's as a result of intervention by Government.
The agricultural market environment tended to favour an expanded arable sector and export barley was a leading candidate.
First the world market had a premium on barley over maize at the time, NZ was a non-traditional source of supply (embargo), we had the capacity to develop exportable quantities of higher valued malting barley (Figure 2) and there were a large number of farmers who were prepared to expand barley production.
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.JUL80 JAN81 AUG81 t",AR82 SEP82
APR83 OCTS3 MAY84 NOV84 JUN85
PERFORMANCE AND OPERATIONS, 1980-85
A principal objective of the Society is to rnaXllnlSe the real return to its grower members from the sale of barley and other crops.
This task is carried out in a cyclical fashion usually based upon the pool concept. One cycle begins with the signing up of farmers for a new pool for a particular grain and finishes with the repatriation of the proceeds from the sale of the last tonne of grain offered to the pool by the clients.
For performance eval uation purposes, it is convenient to separate the work of the Society into five profit or productivity centres. They are:
a) Operations and Policy Setting by the Board of Directors b) Fa nner Contracts and Inventory Control
c) Grain Marketing
d) Foreign Exchange Operations
e) Office Management and Administration
The performance of the Soc i ety depends not only on the efficiency witn which tasks are performed in each of these areas but also on the degree to which these functions mesh effectively.
In this marketing aUdit, each of these functional areas will initially be examined separately and finally an overall assessment will be made.
The marketing activities are comprised of functions b), c) and d) above. These activities are carried out each year in a volatile trading environment. Farmer clients have to be convinced that the Society will continue to offer them an excellent marketing arrangement for the pool a year ahead. Otller firms are competing for the same clients.
Once a farmer client has contracted to allocate grain from a specified area to the Society for marketing, the Society is accepting the responsibility of marketing the commodity to best advantage.
Marketing to best advantage in a volatile market place and exchange rate environment always involves judgement. It is only possible after the pool year has been completed to know with certainty what would have been the best strategy to have followed.
Tnere are two ways to evaluate marketing performance in this type of operating environment. Actual decisions can be assessed against trle optimal decisions that could have been taken, had the Board and l"1anagement kno~m what was going to happen in the future (at least one year ahead). This evaluation framework is of very limited use because it bears little resemblence to the actual decision making environHlent and hence provides limited insights into future
opportunities technique may evolution.
and threats. However, if used with caution this be helpful in clarifying structural change and market The more appropriate evaluation framework is to appraise the actual decisions taken and their outcome against alternative decisions or strategies which are based on the same information set that was available at the time the Society actually made decisions. Normally, it is very difficult after the fact to reconstruct historic information of this type unless the firm has had the foresight to record what might have happened i f other decisions had been taken (for example, data on lost sales, offer prices for alternative delivery dates or grades etc.) In the grain business we are fortunate in having data on futures prices for grain and foreign exchange to fill in the information gaps in historic records. Where a future or forward contract was not used by the Soc i ety, it represents what mi gilt have been achieved instead.
During the pool year, the decision making process at a very basic level consists of a series of daily sell/no sell decisions for grain and foreign exchange based on implicit forecasts of:
a) the amount of grain that will be made available under the contracts;
b) the patterns of world and cereal grain prices for the year ahead;
c) the pattern of exchange rate 1Il0Velilents for the year ahead;
and d) the pattern of interest rate movements for the year ahead.
Higher interest rates increase the value of early sales and reduce tile real value of late delivery premiums. Rising forward discounts can have tne opposite effect on currency transactio~s.
Throughout the year tne degree of upside and downside risk can vary for each of these factors. A marketi ng audi t attempts to assess how well these factors it/ere taken into account in the past and to offer suggestions for possible improvement in performance in the future.
FARM CONTRACTS AND INVENTORY CONTROL
Table 1 outlines the broad patterns of area committed to the Society's barley pools by clients and the pattern of grain sales for the pool years encompassing the 1981-84 harvests.
Ttle data in this table are taken from sLimmaries of the minutes of Oirectors' meetings and sales summaries. For this reason the tables are not necessarily complete. The future price data is taken from the maize futures quotations on the Chicago Board of Trade except during the period of the partial grain embargo of the USSR (Oct 80 - Aug 81) when an assessment based on WZ market prices was used.
The rate of farm sign-up has improved to some extent over the four pool years. Thi s iIlay be measured as the proportion of total commitments at drilling time, say September each year. Some deterioration appears to have occurred in the 1983 pool but the situation improved significantly in 1984.
It must be recogni sed that it will take time for the Society to build confidence amongst growers. The aim ought to be to encourage the earliest possible sign-up. It might be worth considering an early poo1(s) wi th a cut-off date( s) in August/September in addi ti on to normal pools.
The expected farmer supply position is estimated using an expected yield of 4 tonnes/ha. The true supply position was undountedly more complex than this calculation implies. Nevertheless it does appear to be roughly in line with expectations at the time.
When cumulative sales for the pool year (Column 5) are subtracted from committed supplies, one gets an estimate of unsold committed grain.
(In practice d separate record needs to be kept for each grade of grain).
The second illlportant aspect of the farm contracti ng and inventory situation is the degree of co-ordination between signing farmer contracts and grain sale contracts. When the society signs a farmer contract, it incurs risk or a liability from three major sources. There is the risk that:
a) the farmer will not or can not del i ver the expected yield from the assigned area;
b) the export market price (US$) will fall between sign up and the time sales contracts are negotiated;
c) the value of the New (appreciate) against the determine export receipts
Zealand forei gn
dollar will rise currency used to
TABLE 1: BARLEY MARKETING, 1981-84 (Feed and Malting)
Date Farmer's Expected Expected Sales Futures Value Grain Contract Yield Supplies to Price Unsold
Area Date (Month)
--- ---,--- --- --- ---
ha t/ha t t US$/t US$ million
OCT 80 4505 4 18020 0 187(J) 3.37
NOV 80 3.37
DEC 80 18020 ()
AUG 81 6012 4.1 24600 24600 159 Actual 0
AUG 81 3533 4 14132 () 1230) 1. 74
SEP 81 1. 74
OCT 81 11708 4 46832 5.76
NOV 81 5.76
DEC 81 1120) 5.25
JAN 82 113(J) 5.29
FEB 82 23000 2.71
MAR 82 2.71
APR 82 2.71
MAY 82 30000 lll0) 1.89
JUN 82 1.89
JUL 82 1.89
AUG 82 1.89
SEPT 82 47000 0
AUG 82 661 4 2644 0 III(J) 0.29
SEP 82 0.29
OCT 82 3802 4 15208 1.69
NOV 82 6144 4 24576 102(J) 2.51
DEC 82 8379 4 33516 24000 1000) 1.00
JAN 83 9955 4 39820 1070) 1.71
FEB 83 1170) 1.87
MAR 83 ll9(J) 1.90
APR 83 126(J) 2.02
MAY 83 47500 47000 121(J) 0.06
JUN 83 49000 0.24
JUL 83 0.24
AUG 83 49000 142 0
AUG 83 15000 1420) 0
SEP 83 11900 4 47600 1420) 4.60
OCT 83 19149 4 76600 1380) 8.50
NOV 83 23202 4 92800 136(J) 10.58
DEC 83 131(J) 10.19
JAN 84 24615 L. 98500 33000 133(J) 8.71
FEB 84 128(J) 8.38
MAR 84 136(J) 8.91
APR 84 1380) 9.04
MAY 84 1360) 8.91
JUN 84 1360) 8.91
JUL 84 54000 123(S) 5.47
AUG 84 60000 117(S) 4.50
SEPT 84 100000 114(S) 0
FrOll1 thi5 perspective, the Soci ety enters into a specul ati ve position on grain prices (and foreign exchange) from early in the Spring (July/August) except to the extent that sales contracts are signed in parallel with fanner contracts. A rough measure of the size of the speculative position is given by the value of grain unsold (US$), column seven of Table 1. The value of unsold grain is simply the quantity of grain expected to be supplied by fanners less sales to date, times the value of that grain for delivery after harvest (generally taken as July). Ideally one would like to use the future value of Society grain (based on quotations to it) but in the absence of such data, the Chicago Future price for maize is used as a crude proxy.
From a risk management perspecti ve the 1981 crop was handl ed well with respect to price risk. Grain sales for the full amount of contracted supplies were arranged in December prior to harvest. In December the speculative price position disappeared. Furthermore, it appears as if the high (US$3.37 million) price speculative position was in place for only two months. The sales contracts were flexible (14-18,000 tonnes) allowing for some slippage in expected contract supplies.
The sales/supply co-ordination for the 1982 harvest was also handled well bearing in mind it was only the second season of operation. The performance was lower than 1981 with a later initial sale (February v's Uecember) and the last tonnage not sold until September.
The following year 1983 showed a significant improvement.
Initi al sales were compl eted in lJecember with the bul k of the crop so1d in May. This kept the speculative position to less than US$2 million in all but two months.
The 1984 year began well with an initial sale in August.
However, sales progress did not keep up with the rapid increase in farmer sign-up so that the price speculative position of the Society reached US$10 million in Nov/Dec. The position was relieved to some extent in January but it remained at a high level until June and was not eliminated entirely until September.
SECTION FOUR GRAIN MARKETING
4.1 Terms dnd Conditions
Up unti"l 1985, the Society contracted to sell all export free on board, unstowed and untrimmed from Bluff, Lyttelton in US dollars. This has proved to be a low risk that serves the Society and the industry well.
grain for Timaru or procedure
Over ninety per cent of barley sales by tfle Society have been to overseas clients. Local sales have tended to be small and have coverea a range of clients.
Over the last few years, all export sales have been contracted through an international agent in return for market intelligence information. Contracts have been arranged through a range of private grain trading houses.
FurtherlllOre, these sales have involved a variety of export destinations for both malting and feed barley, Table 2.
TABLE 2: EXPORT BARLEY ARRANGEMENTS
Crop Export Number Export
Year Sales Clients Destinations
1981 1 1 1
1982 2 2 1
1983 3 3 3
1984 7 4 6
4.3 Timing of Sales
There has been a tendency for export sales to occur on or after the month of harvest. The most co~non month for sales contracts to occur is January (harvest). On five occasions over the last 5 years, contracts occurred pri or to the January of harvest. On ten occasi ons contracts were signed in the February of rlarvest or later. On six occasions contracts were made in the months of July, August and September following harvest. This distribution of sales is shown in Tai)l e 3.
UIJ unti"l now, the Soci ety tlas not hedged farmer contracts on the maize futures market.
TABLE 3: DISTRIBUTION OF SALES OVER CROP YEAR
1981 1982 1983 1984 1985
Jul Aug Sep
Dec x x
Jan xx xxxx
--- HARVEST tvlonth After
Feb x xxx
Aug x x
Sep x x
In this environment, the Society is exposed to price risk while waiting for a marketing opportunity to arise. This is perhaps most important for malting barley where the market is reputed to be more sporadic.
4.4 i'1arket Share of NZ l3arl ey Exports
Tl'1e Society is the leading NZ exporter of feed and malting barley. Over the crop years 1981-85, the trade statistics (Table 4) reveal that other firms exported only two or three major shipments of barley in addition to small quantities to the Pacific Islands. All other major shipments shown in Table 4 represents sales by the Society.
TABLE 4: TOTAL NEW ZEALAND EXPONENTS UNMILLED BARLEY, QUANTITY UNIT VALUE, DESTINATION, 1981-85
UNIT VALUE DESTINATION (NZ$/tonne, fob)
January February March April
May 33,612 182.7 All
September 180 200.0 United Arab Emirates
October November December 1982
March Neg Norway
16.9 500.0 Sweden
Apri 1 0.1 566.4 United Kingdom
23.0 171. 7 Singapore
May 22,285.9 180.0 Singapore
17.5 192.4 Western Samoa
August 34.9 180.0 Western Samoa
September 18.1 180.0 Western Samoa
December 18.0 180.0 Western Samoa
March 5.1 468.8 United Kingdom
17,000.0 185.0 Singapore
17.0 180.0 Western Samoa
Apri 1 Neg French Polynesia
17.3 180.0 Western Samoa
May 54.2 174.4 Phi 11 i pi nes
17.7 180.0 Western Samoa
June 17.7 180.0 Western Samoa
July 23,195.6 170.6 Taiwan
August 726.0 178.0 New Caledonia
September 773.5 184.1 New Caledonia
October 24,44S.3 196.9 Belgium
November 17.3 202.9 Western Samoa
Table 4 continued 14
(tonnes) UNIT VALUE DESTINATION (NZ$/tonne, fob)
January February March Apri1
August September October November December
17.4 Neg 17.1 23,750.0 17.0 52.68.0 23,775.5 17 .2 12,500.0 90.0 24,744.9 21,440.9 20,000.0 12,600.0 16.9 52.6 17 .8 790.3 17.8 Neg 26,100.0 9,700.0 35.3
203.0 203.0 247.1 220.0 540.0 214.0 182.5 220.0 269.4 263.9 179.8 241.0 261.4 229.8 220.0 214.0 220.0 199.5 200.0 206.2 204.0 200.0
Western Samoa Canada
Western Samoa Saudi Arabia Western Samoa Mauritius New Caledonia Saudi Arabia Western Samoa Unknown (EEC) New Ca 1edom a Saudi Arabia Singapore Taiwan
United States of America Western Samoa
New Caledonia Western Samoa New Caledonia Western Samoa New Caledonia Singapore
United States of America Western Samoa
Australia Western Samoa West Germany
Ireland Saudi Arabia United Kingdom rvlauriti us SaUdi Arabia U.S.S.R.
United Kingdom Jordan
United States of America Western Samoa
500.0 236.4 365.0 200.0
365.0 200.3 200.0 300.0 216.1 211.2 434.9 222.8 6.0
36.0 Neg 53.3 23,750.0 Neg 4.0 82,426.1 24,469.2 344.4 24,000.0 27,500.0 3.9 35.8 April
1985 (Provisional) January
Source: Department of Statistics, External Trade Statistics, INFOS system.
neg means quantities < 1 tonne
4.5 Export Barley Pricing
The FOB export prices negotiated at contract date by the Society have been compared with two indicator prices of competing exporters; the price quotations for feed and malting barley exports by the Western Australian Grain Pool and the export price of US maize from Gulf Ports. These comparisons are shown in Table 5 as Society percentage premiums (or discounts) over the Australian and US prices.
The comparisons with WA Grain Pool prices are also shown in graphical fono in Figures 3 and 4. The WA pool prices are shown by the continuous line and sale prices by the Society as a cross or an asterisk.
The I~A Grain Pool is a major competitor with the Society. Its price quotations probably exaggerate actual transactions prices because they are offer prices. For this reason, the positive premiums (to the Soci ety) probably underestimate the prici ng performance of the Soci ety and the negative premiums probably overestimate the degree of discounting by the Society.
The export prices achieved by the Society represent near future prices because they refer to future del iveries rather than spot sal es.
The Society's feed barley sales have been at a discount relative to the WA Grain Pool of 4.9 per cent. The Society on average has realised a prelilium of 1.2 per cent on malting barley sales. Given the bias mentioned above and the transport cost gradient between New Zealand and Perth for many markets this is an excellent result.
The US compari son is far more tentati ve for a vari ety of reasons. It shows a switch from largely premiums from 1980-83 to largely discounts in 1984-85. Part of the explanation for this may be the effect of the growth in Australian export supplies in recent years.
TABLE 5: SOUTH ISLAND BARLEY SOCIETY EXPORT PRICE PREMIUMS (+) OR DISCOUNTS (-) OVER WORLD MARKET INDICATORS
Year Contract Crop Western Australian US Maize Month Grain Pool Quotations No. 2 Yellow
Barley, f.o.b. Freemantle Lo .b. Gul f
1980 DEC 80 +3.8 +22.2
1982 FEB 82 -4.9 +17.4
SEP 82 -2.9 +35.0
DEC 83 +0.6 +37.6
1983 APR 83 -7.3 -14.9
JUL 83/84 +8.3 +2.1
AUG 83 -11.6 +10.3 -28 to par
1984 JAN 84 -4.4 +4.8
JUL 84 -2.7 -24.3
AUG 84 -4.4 -21. 7
SEPT 84 +5.1 -7.5
1985 JAN 85 -13.0 -8.1 -22 to -11
FEB 85 +1.1 -2.0 -20 to -18
MAR 85 +3.8 -11.5
SOURCE: Computed on the basis of monthly average US dollar prices from Bureau of Agricultural Economics, Canberra and Foreign Agricultural Circular, USDA, Washington
EXPORT PRICE R....
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JULBO JAN81 AUG81 MAR82 SEP82 APR83 OCT83 MAY84 NOV84 LJUN85
EXPORT PRICE RELJ.~TI\TES, FEED BJ..\RLEY
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JUL80 JAN81 AUG81 MAR82 SEP82 APR83 OCT83 MAY84 NOV84 ..JUN85
FOREIGN EXCHANGE OPERATIONS
Tile currency contracts entered into by the Society between 1980
and 1984 compri se three types of transactions: offshore borrowi ng, current spot transactions and forward cover.
The forward cover contracts are closely tied to sales contracts. As such they form an important part of the sales strategy.
Given the fluctuations that have occurred in the foreign exchange market, the forward cover operations are part of the risk management process. The strategy that has been used can be evaluated in the same way as export sales arrangements.
The borrowing and spot transactions can not be similarly eval uated without the term and repayment terms of the loans and tile context of the transactions. In any event the forward contracts represent the bulk of the transactions. For these reason no attempt is made to evaluate the borrowing transactions.
Given the payment terms used by the Society it is exposed to foreign exchange risk whenever the US dollar value of undelivered grain and net overseas balances exceed the current amount of forward cover.
This foreign exchange exposure can be measured in dollars or as a percentage of the value of undelivered grain. The latter measure is called the degree of foreign exchange exposure.
The degree and amount of foreign exchange exposure of the Soci ety has been estimated on a monthly basi s for the 1981 and 1982 harvests and is given in Table 6. In this table, expected supplies have been taken from TaDle 1 and valued at the future market price.
The third and fourth columns detail current and cumulative deliveries (exports and local market) all valued in US dollars. The quantity and value of undelivered barley is obtained simply by subtracting deliveries to date from supplies.
The value of undelivered grain is a gross measure of foreign exchange exposure. Net foreign exchange exposure (final column) is obtained by subtracting outstanding forward exchange contracts from the value of undelivered grain.
In the 1981 crop year, tile Soci ety was exposed 100 per cent to exchange rate changes during October and November. This exposure was reduced to 5 per cent in December when forward cover was taken out in conjunction with the export sales contract. Subsequently, the exposure rose slightly as additional grain supplies came to hand but as of March 1981, the degree of foreign exposure was zero.
The first point to note is that as soon as grain supplies are committed to the Society, the Society (or the growers) are subject to foreign exchange risk. This does not mean that forward cover needs to be Obtained necessarily, but the risk of New Zealand dollar appreciation is present. The amount of cover to be obtained is related to the perceived riskiness of the exposure. Second, changes in financial institutions make it considerably easier to offset US dollar exposure today than was possiole in 1981/82. This is because the US dollar futures market is a flexible tool to assist in coping with these risks and one that is particularly useful early in the season prior to the negotiation of sales contracts. The forward market is most suitable for cover once contracts are in place.
TABLE 6: FOREIGN EXCHANGE EXPOSURES ON BARLEY 1981-82
Mqnth Expected Supplies t US$m
Deliveries This Month t US$rn
Deliveries To Date
Undelivered t US$rn
Forward Cover, US$m Honth To Date
Forei gn Exchange Exposure
(% Undelivered) 1981 Harvest
Oct 80 18020 3.37 Nov 80 18020 3.37 Dec 80 18020 3.37 Jan 81 18020 3.37 Feb 81 24600 3.91
Mar 81 24600 3.91 7400 0.71 Apr 81 24600 3.91
May 81 24600 3.91 17200 3.20 1982 Harvest
7400 0.71 7400 0.71 24600 3.91
18020 3.37 18020 3.37 18020 3.37 18020 3.37 24600 3.91 17200 3.20 17200 3.20
3.37 (100%) 3.37
(5%) 0.17 (5%) 0.71 ( 18%)
Aug 81 14132 1.74 Sep 81 14132 1.74 Oct 81 47000 5.76 Nov 81 47000 5.76 Dec 81 47000 5.25 Jan 82 47000 5.29 Feb 82 47000 5.29 Mar 82 47000 5.29
Apr 82 47000 5.29 23100 3.10 May 82 47000 5.22 6900 0.21 Jun 82 47000 5.22
Jul 82 47000 5.22 Aug 82 47000 5.22 Sep 82 47000 5.22 Oct 82 47000 5.22 Nov 82 47000 4.70 Dec 82 47000 4.70 Jan 83 47000 5.03 Feb 83 47000 5.50
Mar 83 47000 5.59 17000 2.28
23100 3.10 30000 3.31
14132 1.74 0 14132 1.74 0 47000 5.76
1.25 47000 5.29 0 23900 2.19 1.38 17000 1.91 -2.63
1.25 1.25 2.63
1. 74 (100%) 1.74 (100%) 5.76
(100%) 5.76 (100%) 5.25
(100%) 5.29 (100%) 4.04
(76',1;) 4.04 (76%)
1.91 (100% ) 2.19
The Society has not consistently covered foreign exchange exposure after harvest as the estimates for 1982 show. The degree of exposure vias high until April. It was temporarily el iminated and then remained at 100 per cent for the following ten months.
In considering these two years, does it appear that the pattern of exposure was appropriate? First, the 1981-84 period was a difficult one to develop a foreign exchange policy as Table 7 shows. The forward prBniums increased rapidly over the period to devaluation in 1984 and still they were not able to keep up with changes in the spot rates.
Looking Dack it would have been better not to have had forward cover over much of this period. However, that is not the recommendation for future Society policy. In retrospect, the rising premiums in tne forward market look startling and do point towards the collapse that was to come. Such an outcome is never certai n before tne event however.
While the N.Z. Government maintains a floating exchange rate policy, the value of the exchange rate against the US dollar is highly likely to both rise and fall frequently. It is imperative that the Society know on a daily or weekly basis, the degree of foreign exchange exposure of its operations taken as a whole. Secondly, it is highly desirable that management be protected from adverse events that result from a hign degree of foreign exchange exposure when there is a chance of the NZ dollar appreciating. This can De done by means of regular direction frum the Board of Uirectors on the degree of exposure they require. It is the board that must accept such responsibility.
As mentioned earlier the US dollar was tending to appreciate over the period 1981/82. Had the Board believed that this trend would continue it would have been possible for it to instruct management to keep the degree of exposure at a high level, say at 50 per cent. In fact, the policy of the Society was to hedge all confirmed sales of grain on or about the date of sale. While this policy was probaDly not the ideal strategy in the fixed and crawl ing peg system that operated prior to 1985 it is more appropriate under the present floating exchange rate system.
With a rloating exchange rate system there is a strong tendency for the rate to fluctuate (over a period of months) both positively and negatively around its trend value. This is due to the major effects that short-term capital flows and expectations have on the exchange value. However, there is a serious question as to the appropriate point to hedge the future currency contracts. It is most unlikely that the date of sale is always the optimum because as we have seen, the sale may take place many months after the foreign exchange liability is incurred.
TABLE 7: FORWARD EXCHANGE RATES ($US/SNZ)
MONTH SPOT MARKET FORWARD MARKET
(midrate) 9U day 18U day
Reserve Bank Rates [luy/Sell Buy/Sell
(Premiullis - subtract)
1981 J .9611 Par/48 48/48
F .93U2 P/47 47/47
M .9212 P/23 46/Par
A .9020 23/P 45/P
M .8794 P/22 P/44
J .8581 21/P 43/P
J .8396 63/31 126/63
A .82U4 72/31 144/62
S .8289 93/P 187/P
0 .8293 93/P 187/P
N .8315 94/P 187/P
0 .8235 93/P 185/P
1982 J .8116 91/P 183/P
F .7890 94/P 187/P
M· .7785 lU2/P 2U4/P
A .7637 10U/P 2UU/P
M .7719 101/P 2U3/P
J .7531 108/P 217/P
J .7388 ll5/P 231/P
A .7266 136/P 272/P
S .7232 140/18 280/36
0 .7171 139/18 278/36
N .7121 156/18 312/(36
D .7234 172/36 344/72
1983 J .7315 174/37 347/73
F .7222 172/36 343/72
M .6602 173/37 347/66
A .6582 173/49 346/99
M .6641 174/50 349/100
J .6523 245/82 489/163
J .6526 294/131 587/261
A .6494 292/130 584/260
Trading Ceased Temporarily Oct 83 - May 84 -18% -8%
1984 June -12% -20%
July -25 %
July 15 Devaluation
-25 % -25 % trading ceased
FORWARD MARKET SPOT MARKET
Private Market Rates Buy/Sell
1984 Aug .5U60/.4960 .5665/.4925 .5020/4850
S .4963/.4863 .4955/.4835 .4948/4798
0 .49U4/.4804 .4844/ .4729 .4824/466U
N .5UI0/ .4910 .4957/.4837 .4930/4780
D .3890/.479U .4839/.4724 .4773/ .4656
J .4732/.4632 .4647/.4534 .4567/.4447
F .4590/.449U .4487/.4387 .44U5/.4280
M .45/.44 .4380/.4145 .4305/3875
A .4620/.4520 .4505/.4370 .4375/.4220
M .452U/.4420 .4360/.4220 .4225/.4U65
J .4555/.4455 .44/.4260 .4260/.41OU
J .5050/.4950 .4850/.4720 .4725/.4575
SOURCE: Reserve Bank Of NZ, Andrew Hopkinson, pers. comm.
SECTION SIX BARLEY POOL RETURNS 6.1 Farmer Returns
The terms and conditions of the barley pools operated for farmers by the Society are presented in detail in Tables 8, 9 and 10.
It is not possible to compare the performance of the Society's pool directly with marketing arrangements by other firms because the terms and conditions can vary considerably. However, in this report we have estimated the returns offered by the society for mal ting and feed pool s for 1981-85 with the returns of other pool marketers.
The comparative results in Table 8 show that the Society has performed very well relative to other pools, especially in the early years. Pool returns have been consistently higher for the Society
particularly for mal ting barley which has become a specialty product.
Details of the payment procedures are given in Tables 9 and 10.
TABLE~: Estimated Comparitive Net Farmer Returns by Marketing Agent, Barley, 1982-85
Other Floating Crop Year Barley Type 'Farmlands' Price Pool s
$/tonne La. s. at 1 April (1)
1981 Feed 179 144
1982 Feed 157 148
1983 Feed 149 138
1983 t~a1ti ng 176 155
1984 Feed 185 183
1984 Ma 1ti ng 204 189
1985 Feed 184 176
1985 r~alti ng 188 179
(1) The returns are estimated as being equivalent to the net return after interest costs, free along side ship, nearest port as at
1 April following harvest. No account is taken of farmer storage costs which will vary according to date of delivery and type of storage used. Farmer interest costs were taken as 18%
p.a. for years 1981-84 and 25% in 1985.
Source: Table 9 - 10 following
TABLE 9: Barley Pool Payments, 1981-85, FannlandsGrain
Year Barley Payment Date of Payment Amount
1981 Feed Initial 1 June 172.00
Final 10 December 10.63
Storage (1.5 monthly at $2.00) 3.15
1982 Feed Initial 1 August 100.00
Interim 31 August 52.50
Final 31 l'I1ay 1983 10.00
Storage (4 months at $2.00/t/m 8.00
1983 Feed Initial 20 July 100.00
Interim 1 August 42.00
Final 15 December 9.00
Storage (4 months at $2/t/m) 8.00 1983 Ma 1ti ng Intitial &Interim 13 September 172 .00
Final 15 December 12.22
Storage (4.5 months at $2/t/m) 9.00
1984 Feed Fi nal 21 August 190.17
Storage (4.5 months at $2/t/m) 9.00
1984- Mal ti n9 Initial 15 July 130.00
Interim 28 September 50.00
Fi naol 15 December 30.21
Storage (3.5 months at $2.5/t/m) 8.75
1985 Feed Initi al 1 l'I1ay 110.00
Interim 21 I"lay 60.00
Final 2 December 20.03
Storage (30 days at 7c/t/d) 2.10
1985 t'l\alting Intitial 1 June 130.00
Interim 21 October 50.00
Final 18 December 20.57
Storage (60 days at Bc/t/d/) 4.80
Source: Farmlands Grain (NZ) Soc i ety Ltd , Ashb urton
TABLE 10: Barley Pool Payments, Other Floating Price Pools
Year Barley 1981 Feed 1982 Feed 1983 Feed 1983 t/la1ti ng 1984 Feed
Other Floating Price Pool s
Payment Date of Payment Amount
Final 1 June 148.00
Fi nal 1 June 153.00
Final 1 June 142.00
Initial 1 June 100.00
Fi nal 15 November 65.00
Initial 5 May 108.00
Interim 24 August 40.00
Final 14 December 45.00
Initial 5 May 108.00
Interim 24 August 40.00
Fi nal 14 December 52.95
Initial 9 Apri1 108.00
Interim 19 August 60.00
Fi nal 7 November 17.58
Initial 9 Apri1 108.00
Interm 19 August 60.00
Fi nal 7 November 20.97
Source: 1981-83 Farmlands Grain, 1984-85, Cereal Exports, Christchurch
Notes: These pools included a number of marketing agents other than Farmlands Grain
6.2 Administration and ~arketing Costs
The efficiency of the Society can be measured finally by the producti vity of the admini strati ve systems. Thi s producti vity can be measured as the costs of getting the grain to market. In the case of export grain this cost includes expenses from the time of contracting with farmers to fob the export port. These costs can be subdivided into the administrative cost directly associated with operating the Society and its offices, port or fob'ing charges incurred in loading for export and other marketing costs associated with arranging export sales. These costs are presented in Table 11.
Total marketi ng and admini strati on rose in1ti ally from the first year of operation but have since steadily declined from 8.8 per cent of recei pts in 1982 to 7.1 per cent 1ast year. Port charges have taken an increasing share of total costs and this is a disturbing trend. In 1981, fobling charges were 3.4 per cent of total sales but rose to 5.3 per cent in 1984. Other marketing charges have remained constant in relative terms.
Table 11: Administration and Marketing Costs to FOe
Crop Administration Fob'ing Other Total Revenue Cost %
Year ($ Revenue) Charges Marketing Costs Revenue
1981 67 154 17 238 4553 5.2
( feed) (1.5% )
1982 170 610 36 816 9,304 8.8
( feed) ( 1. 8%)
19B3 76 302 21 400 4,706 8.5
( feed) ( 1.6%)
19B3 65 316 25 405 4,971 8.1
(malting) (1. 3%)
1984 84 309 30 423 5,978 7.1
( feed) (1.4% )
1984 286 1,152 107 1,546 21,674 7.1
(mal ting) (1. 3%)