A year has passed, but the sediment remains. And, according to Tatiana Alaverdova, director of the sales department at HarvEast, the negative from non-fulfillment of forward contracts will affect the market and its players for at least a couple of years. Nevertheless, those who have fulfilled their obligations are now actively concluding forward contracts for the sale of future crops and are glad that they have maintained good partnerships with traders.

Have not deviated from the forward program

Our company fulfilled all the forward contracts of the previous year, despite the fact that the price was not very attractive at the time of their execution. So, since the beginning of the execution of contracts, the price was $ 40 per tonne higher. But the further, the more significant the difference grew.

For HarvEast, however, maintaining a company's reputation is far more important than a one-off additional income.

We have not revised the forward program for this year. In fact, they have already sold about 25-30% of the next season's harvest. The share was approximately the same last year. Contracts were concluded for wheat, corn, sunflower, peas. Traders, as before, are ready to work with our forward company.

Whether we will still enter into forward contracts depends on market conditions. Now we are watching the weather, what is happening in the fields. So far we are not completely satisfied with the state of wheat on the main asset in the Donetsk region. The fact is that during the frost period the culture was not covered with snow, there is a slight moisture deficit. Therefore, we observe how it will grow back, we carry out top dressing. Everything will depend on yield expectations.

In principle, our company has been selling 20-30% of the future harvest for several years in February-March. Then we see how the situation with crops will develop in April, May, June, and we can still sell. It is also important to calculate the logistics, to determine how to export and distribute the crop. For some crops, forward contracts accounted for 50% of total sales.

About the cost of hedging

We always pay attention to hedging instruments. Since we work within the framework of Ukrainian legislation and we do not have offshore companies, we can use this tool only through partners. Now we are discussing with them the issues of using hedging elements through forward contracts. In particular, the purchase of options. In fact, the contract price will be set already taking into account the purchase of options by our partners for us and with the possibility of revising the price in a long period.

These instruments were on the market before, but, like most players, we did not believe in such a global rise in grain prices. Last season showed that this is possible.

Judge for yourself: last year there were forwards for corn at $ 150-155 per ton. Now the maximum price for a crop is already at the level of $ 260 per ton. That is, the difference is about $ 100. Nobody could have imagined this. Analytical data show that such growth has occurred for the first time in 10-12 years.

The question is about the cost of hedging as an instrument. For example, the cost of hedging options for corn is approximately $ 5-10 per ton. And if you buy a contract position, it will be $ 18-20 per ton. That is, this instrument is interesting in the expectation that the price will rise by $ 20-30. And it is not cheap for a Ukrainian manufacturer. However, practice has shown that it is still better to have such contracts in the portfolio. And this does not mean that all contracts must be concluded according to such a scheme, but some small share is definitely worth it.

Tatiana Alaverdova, Director of the HarvEast Sales Department

The manufacturer understands that by buying an option, he loses by 1 ton from $ 5 to $ 10 (depending on the selected exchange option). Everyone decides for himself whether he is ready to spend this money. If this price is within the scope of the company's planned production EBITDA, then you can use the option and enter into a forward contract. And then watch how the situation is developing. After all, no one knows what will happen next: neither analysts, nor farmers, nor traders. Essentially, companies are trading their expectations.

Manufacturers are now actively entering into forward contracts because the prices are good. In particular, in December 2020, forward contracts began to be concluded for corn at a price of $ 185 per ton. Today, the price reaches $ 205-210 per ton. Of course, many are in a hurry to sell the future harvest. Although it is known that not everyone can enter into forward contracts. For example, traders will not cooperate with those who did not fulfill their obligations to partners last year. After all, everyone shares information with each other and knows who was guilty. Such a negative aftertaste, I think, can affect the market and the capabilities of some manufacturers for a couple of years.

Tatiana Alaverdova, Director of Sales Department, HarvEast

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