The open market is coming and wheat farmers have a lot to learn in a hurry, marketing experts told farmers attending Ag Days in Brandon.
While seminar speakers filled farmers in on the ins and outs of what is expected to be a new era for grain marketing in Western Canada, representatives of the now government-controlled Canadian Wheat Board reassuring producers it will continue to be there for them too. (see page 3).
But whether they go with what they know or deal with the private trade, farmers were told they need to consider their options carefully.
“You have to shop it around,” said Brenda Tjaden Lepp of FarmLink Marketing Solutions.
“If you can sell $7 new-crop spring wheat to somebody and it’s a No. 1 13.5 per cent, or you can sell $7 spring wheat to someone else and it’s a No. 2, well you’ve just saved yourself whatever the grade discount was going to be at time of delivery.”
Farmers should also think twice about whether they even want to grow high-protein wheat. Calculate whether the premium it will fetch on an open market will cover the extra fertilizer costs, said Tjaden Lepp.
“Mid-grade wheat is simpler to market than high-protein milling wheat,” she said, adding fewer quality risks are associated with mid-grade varieties.
Farmers can also expect marketplace volatility to continue to affect wheat prices for months and possibly years to come, said Tjaden Lepp.
The expert’s talk left some farmers surprised by how much they will need to learn about marketing their wheat on the open market.
“I’ll put it this way, I didn’t realize how little I know until now,” said Richard Cousin. “This is going to be a big switch, a huge change and we have to learn it now, right now really, because next year is a whole different year.”
Cousin said he is considering hiring a professional adviser on how to handle the new system.
Another producer, who didn’t want his name published, described the session as a “wake-up call.”
Farm management consultant Trevor Elyk was handing out a few more cautions in a presentation entitled “The Wheat Market is Changing — Time is Running Out.”
He urged farmers to skip the equipment displays and start getting to know grain buyers.
“That’s where the money is going to be made,” said Elyk, a former canola buyer now with MNP.
“Those guys are going to help you next year with the market changing and you guys — hopefully — will be able to market your wheat on your own.”
Elyk, who was a canola buyer until three years ago, advised farmers to choose a grain buyer based on who offers the best service and profitability.
Payment and pricing options, grading acceptance and delivery, and especially location, are key.
“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,” said Elyk.
He also predicted price volatility will be the new norm and said it will be easy to get into trouble due to the sheer size of wheat contracts. Unlike the 20-tonne contracts for canola, the new ICE wheat futures (due to be up and running this week) will be based on 100-tonne contracts just as in the U.S. That ups the risk by a factor of five, he noted.
“That’s something to think about. You need to be able to cover off these contracts,” he warned.
Grain buying is a low-margin, high-volume business. When Elyk said he worked for Agricore United, it moved two million tonnes each year to Vancouver. Margin was only $25 per tonne.
Grading is a “huge moneymaker” for grain companies, he added. They buy heated or damaged canola and then use their huge volumes to blend it at port and sell it as No. 1 Canada grade.
Avoiding downgrades in the bin, therefore, is the key to preserving value, he added.
“The farmer doesn’t grow enough to blend off his No. 3 Canada into his No. 1 Canada and deliver it,” said Elyk.
As for deductions on quality, he advised farmers to “read the fine print” and know what they can expect to get for lower grades. Also, variable protein and grade premium discounts should be examined.
Trucking premiums will likely be blended down to a “basis” based on the port price minus freight back to the elevator plus weighing and inspection. Using location to good advantage could boost the price paid for wheat. Better prices may be found at local mills near cities and the U.S. market, especially for farmers south of the Trans-Canada.
While canola has only eight downgrading specs, wheat has 23 based on Canadian Grain Commission rules all the way down from No. 1 to feed. How the grain is graded, whether by visual kernel characteristics or some future “measurable” methodology, knowing what’s in the bin and preserving quality is critical, he said.
“This is what grain companies are going to use to buy grain from you at lower costs,” he said.
One upside to an open market could be more efficient grain movement, said Elyk, because board and non-board products won’t have to be kept separate.
One downside is the lack of a guaranteed buyer.
“If you’re unable to meet the specs on the contract, where are you going to turn?”
Having backup plans is key, but Elyk said he views shipping to the U.S. a last-resort option. Currency volatility, the risk of leaving unpriced grain in a U.S. elevator, and pushback, such as delayed service or a tariff, from American farmers and their lawmakers are factors to consider, he said.
Tjaden Lepp also had a word for those still hoping for a last-minute reprieve for the single desk because of court challenges to the federal governments Bill C-18.
“I could care less about the lawsuit, I could care less about the philosophy and the rest of it – sorry if people feel otherwise,” said Tjaden Lepp.
“But to me right now, the most important thing for a farmer is managing the risk and locking in some profit on next year’s grain production.”