Monday, 29th April, 2024 – “Price May Rise for Rain-Hit Crops”
When it comes to agricultural produce, their financial impacts are usually 2 – 3 tiers because they are raw materials with varied end products, used for different purposes. Upon encountering this headline featured on LinkedIn News top stories, I saw a massive learning potential for this community. Let’s dive right in!
It reads: “Cereal harvests could be down by almost 20% in the UK this year following record wet weather over the past 18 months, farmers have warned. The period of October 2022 to March 2024 was the wettest 18 months since records began in 1836, the Guardian reports. Farmers are now finding crops are flooded or damaged by the wet weather, or unable to plant them to begin with. Output of wheat, barley, oat and oilseed rape is expected to be down by up to 4m tonnes, a drop of 17.5% on last year’s figure.”
So in this particular news, the major point that summarizes the news and grasps the readers’ attention is that “The period of October 2022 to March 2024 was the wettest 18 months since records began.” This could easily imply that crop yields is expected to be the worst it could ever be since records began. On a tier 1 (primary) level, as a farmer or a user/consumer of grain, this is obviously bad news. However, it possesses opportunities for certain financial participants.
The first financial implication of such news is the increase in prices. This is because the news implies that there’ll not be as much supply of the crops as there was the previous year, yet demand for the crops is assumed to basically remain the same. If the farmers supply at the same price as the previous year, there’ll be a decrease in profit compared to the previous year. However, if they sell a bit higher, they could still sell all their stocks, and recoup some of the profit lost to the weather condition. (see figure 1 below). Suppliers may also capitalize on the situation by hoarding produce or driving up the prices of their old stocks.
The second is in its implication in the cost of production for companies heavily reliant on the affected crops such as cereal and bread producers. As a result of increased prices, it becomes costlier for the companies to produce the same quantity of products made the previous year. This cost could lead to reduced earnings for the companies, or necessitate passing on the cost burden to their customers through higher product prices.
Thirdly, reduced earnings for affected companies could negatively impact their share prices. Public perception plays a crucial role, as investors may interpret lower earnings as diminished company value, leading to potential sell-offs and share price declines. However, long-term investors may adopt a strategic approach, selling at opportune moments and reinvesting when they perceive prices to be at their lowest, banking on future improvements in farming conditions.
Lastly, crops such as grains are globally traded commodity derivatives. Commodity derivatives are financial instruments whose values are determined by the traded commodity. Therefore, when the price of grains increases as a result of scarcity, it affects the value of its derivative. [for the purpose of keeping this publication short, we will not explore this section further. Derivatives as financial instruments are more complex than this, but I am happy to simplify it for you if you express a desire in the comment section]
As demonstrated, an adverse natural occurrence impacting agricultural produce can have cascading implications across multiple tiers, from farmers’ yields to companies’ bottom lines (net earnings) to financial market instruments.
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