Wynnstay highlighted the pressure on grain traders’ cash reserves thanks to market volatility even as it unveiled record half-year results, and said it was “very confident” over prospects.

The UK-based feed-to-fertilizer group reported a 50% surge in volumes traded by its GrainLink grain trading business in the November-to-April half, reflecting “a return to more normal… tonnages and yields” in the domestic harvest last year.

UK wheat production rebounded by 45% last year to 13.99m tonnes from 2020 levels depressed by a wet autumn, which hampered sowings of winter grains, and a dry spring which diminished yield potential for what was seeded.

Wynnstay also reported “new business wins generated by the expansion of dedicated resource” in grain trading.

‘Very significant margin calls’

However, the downside of this expansion was that it swallowed up extra cash as prices soared, with Wynnstay needing to put aside extra reserves to support hedges it had made against futures to avoid the risk of carrying naked positions on grain sales made to the company by farmers.

“One impact of rising crop prices has been the need to meet very significant margin calls on forward grain hedging contracts,” the group said.

“We use these contracts to provide an effective hedge between our grain purchases from farmers and subsequent sales to food manufacturers,” Wynnstay said, adding that it “does not permit use of derivatives for speculative purposes”.

London wheat futures, on a spot contract basis, soared more than 50% to £329.50 a tonne during the October-to-April period, before going on to set a record high of £361.00 a tonne in May.

The spot July lot has since retreated to £255.00 a tonne, in line with the pullback on world prices reflecting northern hemisphere harvest pressure, world economic concerns and, in the UK, decent prospects for 2022 yields.

‘Positions will unwind’

Wynnstay noted that cash tied up in margin calls as crop is delivered from farmers, before being passed on to users such as feed and flour mills.

“Forward positions will unwind over the course of the next six months as the physical grain is delivered and these contracts unwind.”

However, the drain on cash flow caused by high and volatile futures prices has prompted some smaller grain traders to voice concern to GrainPriceNews over their viability, and suggest a fresh wave of industry consolidation.

‘Ongoing farmer confidence’

Wynnstay reported earnings up 73% at £7.51m for the half, on revenues up 34% at £355.7m, lifted by the takeover of the Humphrey feed and poultry businesses, and a one-time boost to its fertilizer business from soaring prices, as well as the fillip to farmer confidence from elevated crop values.

The results “reflect a strong trading backdrop, supported by buoyant farmgate prices across most categories, which boosted farmer sentiment and farm investment”, the group said.

“Strong farmgate prices for most agricultural produce has continued to underpin sector sentiment despite farm costs also rising, particularly for fuel and energy.”

The company said it was “very confident” over prospects for the rest of its financial year.

“The trading environment for farmers remains well-supported by strong farmgate prices, which will help to underpin ongoing farmer confidence and investment.”

Wynnstay shares stood 0.9% higher at 640p in morning deals in London.