“Shop it around.”
“Read the fine print.”
“Work with companies you trust.”
“Don’t try doing this without professional help.”
The advice is flying thick and fast as farmers try to wrap their heads around the prospect of selling their wheat, durum and malt barley on the open market for the first time since their great-grandfathers were in business.
Gosh, gee whiz — it’s kind of complicated. At least that’s what some would have you believe.
“If you haven’t used brokers or futures markets as a way of hedging your pricing already on the crops that you’re growing on the open market, I don’t think wheat is the time to start,” one well-intentioned consultant cautioned his audience at Ag Days last week.
Actually, it’s not that complicated at all. The simple truth is, the grain handlers make their money based on thin margins and high volume. And if news reports are accurate, they are planning to make more money in the post-CWB environment.
The price of wheat hasn’t gone up; if anything, it’s going down. So that means somebody is going to be making less.
The more volume they move, the more money these companies make. The more they can scrape off the farmer’s razor-thin margin through quality discounts on the driveway, the more they can boost their margins by blending up to a higher grade.
This isn’t cynical or insidious — it’s just the grain business.
Downgrading factors are where it’s at. With canola, there are eight factors that can discount the price. With wheat, there are 23 ways they can get you. That part hasn’t changed.
Just deliver top-quality wheat in top-quality condition all the time and you’ll be laughing all the way to the bank. But if you don’t have that, marketing your wheat will be a question of who wants your volume badly enough to downgrade you the least. If the industry moves away from buying by grade, all bets are off.
Delivery contract terms are expected to be one area where farmers need to read the fine print. Who is left with the storage costs if there are transportation snafus?
The U.S. market will now be an outlet, at least in theory. But again, farmers were warned that if there are 10 trucks lined up at a North Dakota elevator for delivery and one of them is Canadian, the Canadian truck will be the last one to unload, pending available space. And if you run into disputes over quality or payment, you’re on your own.
Oh, and keep in mind that the new ICE Futures contracts for wheat is in 100-tonne quantities versus 20 tonnes for canola, which implies a higher degree of margin risk to keep those contracts in play. By the way, market analysts are predicting markets will continue to be volatile with much wider prices swings than what was considered normal in the past.
In the midst of all this is the new Canadian Wheat Board, on one hand laying off staff in a “right-sizing” exercise and on the other, assuring producers it has people and experience farmers can trust.
The board is proposing a sort of co-operative competition with the grain companies.
Gord Flaten, the board’s director of marketing and sales, outlined a plan whereby the board will form partnerships with its competition using as carrots the volume it hopes to supply on behalf of loyal farmers and its access to lower-cost borrowing.
The board is planning to offer a range of pricing options for farmers ranging from pools, to hedge-to-arrive contracts to outright cash prices. But the operative word here is “planning.” Flaten couldn’t say when its programs would be finalized.
Other grain companies, undoubtedly including some of the same companies with which it wants to negotiate handling contracts, are already signing new-crop contracts with farmers.
The new board is no longer restricted as to what commodities it handles. As well, it will now have the ability to market grain from other origins.
We see one possible niche emerging for the new CWB as a marketer of high-protein milling wheat on behalf of farmers on the Northern Plains.
North Dakota is still populated with farmer co-ops that might be interested in tapping into the board’s reputation for quality and consistency in supplying international markets.
If the board was able to lock in the majority supply of North America’s top-quality milling wheats, it might still be a marketing force on behalf of farmers.
It remains to be seen whether the board will be able to work with the same companies with which it must now compete. That will largely depend on whether it will have enough volume to make it an attractive partner.
In this new era of marketing choice, the vast majority of farmers will find they still need a middleman. Who’s it going to be?