Mackay growers were the first in Australia to be able to individually forward price, and have had access to innovative and flexible forward pricing arrangements for more than 15 years.
But what is forward pricing, and should it be a part of your overall pricing strategy?
What is forward pricing?
Forward pricing, which Mackay growers know as long-term banded pricing, enables you to ‘lock in’ a price for sugar beyond the current season. Depending on views about what the market will be like in the future, the price you can get for sugar in a future season may be higher (or lower) than the price available in season.
Using forward pricing, you can price part of your estimated production for up to three seasons ahead.
When you forward price, you don’t get paid at the time of pricing, but the price is ‘locked in’ for that sugar when it’s produced and delivered in that future season.
So if you priced 2020 Season sugar today at (let’s say) $430 per IPS tonne, that’s the price you will get for that sugar once it is produced and delivered in the 2020 Season. This pricing (for the amount you chose to price) will be incorporated into your 2020 Season cane pay.
As a Mackay grower, there are two options for forward pricing, and we are more than happy to talk to you about these. Remember, the decision to forward price depends on your business and personal circumstances, and only you can decide whether forward pricing is right for you.
What are the benefits?
Securing a proportion of your returns for a future season allows you to manage budgets and revenue with more certainty, and to diversify the management of your price risk by pricing across more than one season.
Another potential benefit is if you forward price at a particular level, and then over time the market moves lower, you have avoided a lower return for the portion of sugar you priced.
What are the risks?
Once a sugar price for future season sugar is entered into, sugar needs to be available to supply that contract. If, in that future season, you can’t supply sugar that has already been sold, the sale has to be ‘unwound’, which can have financial consequences. Sometimes these can be positive, but sometimes not.
Also, if you’re thinking of selling your farm within the next few years, you should consider what impact a commitment to produce and deliver sugar in a future season might have on a potential sale.
Another potential risk is that of lost opportunity—if you forward price at a particular level, and then over time the market moves higher, you could miss out on a higher return for the portion of sugar you priced. However, if you priced at a level that provides you with a return above your costs of production, you have still made a sound decision, even if you missed out on the ‘top’ price that was available at some point in time.
Want to know more?
If you’d like to find out more about forward pricing or to discuss the options available to you, please don’t hesitate to give us a call on 1800 774 246.
26 October 2018