KOWR offers the best prices for wheat. There are no such valuations anywhere. This is, of course, an exaggeration, but the changes that have occurred in the rules for calculating rent will have a long-lasting impact on the economics of production.
- Market prices are up to 70% lower than the average national purchase price
- We will continue to experience changes in rent calculations for a long time
- Initiatives are being developed to “indicate KOWR warehouses” in order to settle contracts
The effects of market destabilization in 2022 will be felt in rent throughout this year and probably next year.
According to the new rules, the amount of the KOWR lease fee is calculated on the basis of the average wheat purchase price for the last 11 quarters. Previously, the half-year (two quarters) preceding the payment date was counted. The change in rules had as many supporters as opponents. Theoretically, it allowed for obtaining a more realistic price in the long term, but on the other hand, it exposed us to the situation we see today. The prices of 2022 and early 2023 will follow us for a long time. In 2025, the prices from the first quarter of 2023 will be used to calculate the rent rate in KOWR.
The greatest risk of such a change was that one year would result in high rental rates in subsequent years, when prices may be low. This worst-case scenario came true very quickly. Rent amounts are already up to 70% higher than the real market price. Let us remind you that the average national purchase price of wheat for the previous 11 quarters was set at PLN 117.34/dt (converted into tons – PLN 1,173.40/t). This price is no longer available anywhere, and in fact we have seen much lower prices since March and April last year. However, KOWR rental rates are much higher than real market valuations due to the fact that they were determined largely on the basis of “war” prices, i.e. the market destabilization situation in 2022 and the end of 2021.
This year’s rent is the third highest in history
What were the rates before? The current rent was charged for the first time according to the new rules. The previous one was calculated based on the average national wheat price for half a year. Thus, rental rates in previous years were as follows:
1st half of 2023 – PLN 109.97/dt
2nd half of 2022 – PLN 152.17/dt
1st half of 2022 – PLN 153.67/dt
2nd half of 2021 – PLN 100.71/dt
1st half of 2021 – PLN 93.04/dt
2nd half of 2020 – PLN 74.21/dt
1st half of 2020 – PLN 76.56/dt
2nd half of 2019 – PLN 67.20/dt
1st half of 2019 – PLN 81.20/dt
2nd half of 2018 – PLN 76.96/dt
1st half of 2018 – PLN 67.01/dt
If we look at the matter through the prism of the ranking, the current rent charged is the third highest in history.
At the time of introducing the changes, it was estimated that this method of calculating rent would allow us to become independent from large price fluctuations. In practice, it turned out that not only did it fail to achieve independence, but in fact the dependence on destabilizing market situations is even higher.
It can’t “tuck”
It turns out that with a hypothetical rent for land with an area of 1 hectare set at 2 tons per hectare (20 dt), you have to pay a rent of PLN 2,346.8. Taking into account market realities, it is currently even over 3.5 tons of wheat per hectare. With an average yield of around 6 t/ha, almost 60% of the yield must be given for each hectare.
Of course, rental rates vary. Those from point tenders are lower, but we also know that there are also those where – to put it simply – auctions were for 5 t/ha and more. Everyone knows the risk and should be aware that prices may be much higher than at the time of the tender, but at the moment the situation is completely stalemate. If a hectare was “auctioned” for 5 tons, it turns out that you have to pay PLN 5,867. This is at current valuations of 8.5 – 9t/ha. There is absolutely no chance for such production to be economically viable. The costs of cultivation also include fertilizers, seeds, plant protection products, fuel, etc. And the crop may not be enough to pay the rent. Be that as it may, with such rates and such a high rent, there is no chance that even creative accounting could establish any profitability here.
With such an average price of wheat, it may be that even lower rents from spot auctions will completely reduce the potential profit from cultivation. It turns out that with the lowest rents, of the order of – let’s assume – 0.5 t/ha in poorer lands, we miss out on possible earnings. After all, we had many plantations where the amount left after harvest was PLN 500-600/ha (if we managed to make money).
Where does KOWR have its warehouses?
Therefore, there are initiatives to submit applications to KOWR for rent remission or – note – for “indicating the place of delivery of wheat to warehouses managed by KOWR in order to settle the amount of dt from lease agreements concluded with the National Center for Agricultural Support”.
Where does KOWR have its warehouses? Where can goods be transported at the price set for the lease? At current valuations, KOWR actually offers the best offers for wheat. Of course, this is an abstraction, an exaggeration.
The changes that were supposed to stabilize the situation with leases turned out to be disastrous, short-sighted and unfavorable in practice. This is how we look at the situation today; if we went back, we would probably have a different view. What’s important though. Under the current rules, the inflated prices when determining the rental rate to the KOWr will remain in force for almost two years, because the relatively high prices for wheat from the first year of the war in Ukraine will continue to keep the low price.
