Forward contracts give farmers certainty, and bakeries a fixed cost.
The three largest grain co-operatives in the Calder region have agreed forward prices for next year’s harvest, fixing what their members will receive for wheat, barley and oats more than nine months before a single seed goes into the ground. The contracts, signed on Thursday with a group of millers and bakery chains, cover about 180,000 tonnes of grain, or roughly two-thirds of the region’s expected output.
Milling wheat has been fixed at £214 a tonne, about 6 per cent below this year’s average spot price but well above the level at which most farms break even. Malting barley is set at £228, reflecting strong demand from the region’s brewers, and feed oats at £172. The contracts include a clause allowing either side to reopen the price if spot markets move by more than 20 per cent in either direction before harvest.
Why farmers are taking less
Agreeing to a lower price than the current market may seem odd, but co-operative managers say their members have had enough of volatility. In the last three years, the spot price for milling wheat has swung between £168 and £262 a tonne, driven by weather in distant growing regions, shipping costs and shifts in currency markets that have little to do with what happens in the Ardle valley. Farmers who sold at the wrong moment lost tens of thousands of pounds.
“A farmer can survive a low price if he knows it is coming. What breaks people is planning for one number and getting another. These contracts let us borrow, invest and sleep at night.”
That is how Callum Dunmore, chief executive of the Upper Valley Grain Co-operative, which represents 340 farms, explained the deal. He said a survey of members found that more than 80 per cent were willing to accept a modest discount in exchange for a guaranteed price, and that several banks had already indicated they would offer better borrowing terms to farms with a signed forward contract.
The certainty matters particularly for decisions about fertiliser, which farmers buy in the winter months. Fertiliser costs remain about 40 per cent higher than they were five years ago, and a farmer who knows his selling price can calculate precisely how much to apply. Agronomists expect the contracts to encourage more careful use of inputs rather than the defensive overspending seen in volatile years.
The bakeries’ side of the ledger
For the buyers, the appeal is equally straightforward. Flour accounts for between a quarter and a third of the cost of a standard loaf, and the region’s bakery chains have struggled to set prices when their main ingredient might jump by a third in a single season. Fixed contracts allow them to plan promotions, agree wages and, in theory, hold shelf prices steady through the year.
Philippa Noakes, the finance director of a family-owned bakery group with 26 shops across Calder and Harrow, said the business had been forced to raise the price of a large white loaf three times in eighteen months. With grain costs fixed, she said, the group intended to hold prices flat until at least the following autumn, and would use the stability to open two new shops in the old town.
The millers sit between the two, and their role is perhaps the least visible. The largest mill on the Ardle, which processes about half of the region’s milling wheat, has agreed to take the co-operatives’ grain at the fixed price and to pass on a corresponding fixed price for flour to its bakery customers, taking a small margin for handling and storage. The mill’s storage capacity has been expanded by 30,000 tonnes over the past year, partly to make such arrangements possible.
Risks in the small print
Not everyone is convinced. Some traders point out that if harvests elsewhere fail and global prices spike, farmers will have locked themselves out of a windfall. Others worry about the opposite risk: that a bumper harvest pushes spot prices so low that buyers try to renegotiate, testing the 20 per cent clause before it has ever been used. Analysts at the regional agricultural bank estimate that forward contracts have about a one-in-five chance of looking expensive for at least one side by harvest time.
There is also the question of yield. The contracts commit farmers to deliver set tonnages, and a poor season could leave some unable to meet their obligations. The co-operatives have built in a pooling arrangement so that shortfalls on one farm can be covered by surpluses on another, but a region-wide drought or wet harvest would strain that system. For now, though, both sides seem content to trade a little upside for a lot of certainty, and smaller co-operatives in the hill towns are understood to be negotiating similar terms.
