The Farm Marketer’s Link

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
As the transition towards an open market system evolves, we’ve been hearing the comment more frequently about what a big deal it is that wheat will now be a ‘cash crop.’ Indeed, being able to generate cash flow on demand from wheat will greatly improve individual producers’ ability to make good, successful grain marketing decisions.

In the fall, many producers have often been forced to sell non-Board grains in order to generate cash to pay the bills, or because they’ve run out of bin space and there’s only been a 25% contract call on wheat. Being forced to sell crops when the market is signalling not to comes with a cost. That cost is equal to the price the farmer gets when they are forced to move it, compared to the higher price that comes available afterwards.

It’s impossible to know exactly what price might have been achieved if the farm hadn’t been forced to sell at an inopportune time. Saying that fall is an inopportune time to sell further assumes that one’s forecast for the non-Board market to rise post-harvest was accurate.

Much of the fear that farm prices will end up in the bottom end of the range without the CWB and mandatory pooling is unfounded. Market analysis works, and farmers have been investing in effective market research and opinions about future price direction for years. Even in wheat in recent years, forecasting price direction is the way farmers made decisions about whether to choose the CWB’s cash price (Fixed Price Contract) on a particular day, or to wait.

They don’t always post the lows of the year in September, but canola, peas, oats and other non-Board markets do face seasonal price pressure in the fall. The vast majority of distress-type sales end up happening in the post-harvest period, sometimes due to the inability to move more wheat. Allowing crops to move off farms to market in this way is weak. Better prices are achieved by farms that hold their crop in strong hands.

‘Strong hands’ is a grain industry term that refers to the skill of buying and selling at the most opportune times. Through contact with other buyers and sellers, traders maintain a sense of how badly the market wants to own or get rid of grain stocks at any particular time, and responds by either offering or holding back their own market interest accordingly.

To develop ‘strong hands’ will involve monitoring and sensing market tone on an ongoing basis, which will be new to some producers. But in all cases, it starts with removing restrictions from positioning the farm to sell according to market signals post-harvest. Next year, Prairie farms’ ability to get to this position will be greatly facilitated by the ability to use wheat as a cash crop.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
The past month has witnessed periods of tremendous volatility in not just grain markets, but the broader financial markets in general. The uncertainty surrounding the debt crises in the Europe, impending recession in the U.S., and the unfavourable ripple effects on such key emerging economies such as China have put pressure on everything from stock indexes to industrial commodities such as copper and crude oil. The selling comes both from fundamental concerns over reduced demand as economic activity slows, and also from the unwinding of speculative positions as the world is deemed an increasingly risky place.

The Canadian dollar has also seen big swings during this time. The move from its high of around $1.05 USD/CAD in late July to its recent low below 96 cents is around 8%. What this means, all things being equal, is that Canadian grain became relatively 8% more competitive than i.e. the same product out of the U.S. during this time. If we look at a crop like canola, with a futures value of around $530/MT, this works back to nearly $1/bu.

It’s a bit oversimplified to suggest that this full effect ends up directly into farmer’s pockets, as there are many other factors that impact export markets. These include freight rates and other logistical issues, import demand, availability from substitute products, and regulatory issues, just to name a few. However, there is no question that there are beneficial impacts to a weaker currency.

But while the focus tends to be on our exchange rate relative to the U.S., most of our grain gets shipped to non-U.S. markets. This means that any weakening of the loonie relative to the greenback doesn’t help us if our import destinations are drifting lower at the same time.

The lower loonie has given us windows of relative advantages against these other exchange rates as well. For example, the Canadian dollar lost roughly 3% of its value relative to the Indian rupee in late September and early October. This may not sound like much, but for a $9/bu commodity like peas, the direct impact is nearly 30 cents/bu. Much of this move has been reversed since that time, but it is a reflection of how large the moves between the various cross-exchanges can be, particularly in this market environment, and how that can effect net farm returns.

There are many moving parts that work into the cash bid that farmers see at their local elevator. Many of these dynamics are obvious, such as surprises in government reports or announcements of large purchases from major export markets. But there are also changes in values that can also have a meaningful impact on net returns that growers need to be aware of that are more subtle.

By Jonathon Driedger, Senior Market Analyst, Grunthal, Man.
One of the arguments commonly put forth in the CWB debate by proponents of marketing choice is that they see higher cash bids on the U.S. side of the border than what is available through the CWB. The pro-monopoly response to this is that these values don’t reflect the price that the CWB would receive on world markets, and that most producers don’t have access to these elevators anyway.

While some of these rebuffs are valid, and a pure comparison between current U.S. elevator bids and the CWB PROs or Fixed Price Contract values is a bit oversimplified, periodically examining this relationship does shed some light on the price that the CWB is willing to allow Prairie producers to lock in on one of their Producer Pricing Options.

For example, recent elevator bids in the northern U.S. showed a basis level of between 35 cents and 60 cents per bushel under the Minneapolis December futures contract for delivery this fall for 14% protein hard red spring wheat. In comparison, the CWB Basis in-store for #1 CWRS 13.5% was $36.93 per tonne under the December futures after including the Adjustment Factor. If we assume deductions of $55 per tonne back to the grower from the in-store value, the comparable ‘basis’ is about minus $92 per tonne, or $2.50 per bushel under the December futures.

This puts the difference between what a northern U.S. elevator will pay a farmer today and what the CWB will allow growers to lock in is approximately $2/bu. Although this comparison isn’t purely apples-to-apples, they are close enough to know that this spread is enormously wide.

Whether deliberate or not, what this big discount essentially does is heavily penalize those growers that try to make proactive decisions in managing price risk and locking in margins, to the point that this becomes implied mandatory pooling, even if other pricing options are offered. It’s also these types of price relationships that increasingly frustrate growers who might otherwise be more sympathetic to some of the pro-monopoly supporters.

There are many aspects to the CWB debate that need to be considered. And perhaps there are numerous ways that the CWB adds value to growers. But it’s certainly not through offering competitive values through their PPO programs. The current spread may be egregiously wide, but history has consistently shown their values to lag by a wide margin (hence the removal of the popular Daily Price Contract a few years ago, whose value was directly tied to an unbiased U.S. elevator bid calculation). And so far their explanations for these price discrepancies have been unsatisfactory.

By Jonathon Driedger, Senior Market Analyst, Grunthal, Man.
Grain markets have come under heavy pressure over the past couple of weeks. This has particularly been the case in futures markets, where corn has lost $1.75/bu from its recent highs, while soybeans are off nearly $3/bu and canola down by over $50/MT.

There are several factors that have come together at the same time that have all fed off each other in a negative way. It started with the positive underlying fundamentals resulting in traders building up big long positions in the market. With prices up at levels that were starting to choke off demand, the market started to digest some slightly bearish news on the supply side in the form of modestly larger yield reports in the U.S. through early harvest. The results weren’t much off of expectations, but it was enough to temper some of the bullish enthusiasm in a market that had gotten overbought.

However, the intensity of the selling really started to pick up once the weakness in outside markets started to spill over into the grain pits. Fund managers were staring at losses in their stock and commodity portfolios and started liquidating positions without prejudice. This only triggered further selling as charts turned more negative, which set off something of a domino effect.

The final straw was last Friday’s USDA report which showed larger old crop stocks of corn and wheat than the market had been anticipating. While the supplies weren’t enough to make a huge difference in the context of the broader fundamentals, it just provided one more reason for psychologically wounded traders to further reduce positions that they were already facing losses on.

It’s difficult to separate the ‘noise’ from the ‘substance’ during these times, but that is the difference between making panic sales at the height of uncertainty, and making disciplined marketing decisions in the context of new information. A well thought out marketing plan would probably have already included sufficient sales going into the fall to allow growers to ride out these periods of volatility. After all, prices were near record highs and had a great deal of good news already priced in, and the outside markets have been showing hints of vulnerability for many months.

In the context of the fundamentals, corn, soybeans, canola and other crops are all still facing supply / demand balances that are still relatively tight. Are they tight enough to see markets revisit their recent highs? That’s debatable, and only time will tell. But the fact that basis levels have been firming up during this sell-off, which in turn has partially cushioned the blow on a net cash basis, is one positive sign that maybe the futures markets have been getting a bit overextended to the downside. Prices for non-futures traded crops have also held up relatively better.

However, that doesn’t mean we might not see more downside ahead. As long as the financial markets continue to get periodically shocked by outside events, there is always vulnerability.

I’m sure many of us wish we would have sold more aggressively prior to the recent break for those crops most affected. But having a disciplined selling strategy and anticipating cash flow needs makes it easier to be patient and weather these storms, which in turn allows for better decision making during those times when the immediate future looks most cloudy.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
At the core of the current debate about the value of the Canadian Wheat Board (CWB) monopoly is the question of whether an individual producer can ever expect to do better than ‘average’ in pricing their crop. It speaks to the economic theory that farmers are price takers, and asks the question, does market analysis work to achieve above-average prices?

The CWB’s sales policy was founded on the assumption that farmers are price takers, which means that they can’t control the price they are paid for their crop. Their marketing activities are designed to achieve an average price because the assumption is that this is the best possible outcome, short of just being straight lucky.

While it’s true that an individual farmer’s decision to sell or to hold back his or her crop on any given day won’t affect prices broadly, it’s a complete misuse of that assumption to say that farmers are helpless in the marketplace.

Market analysis tools including consultants, a broad range of newsletters, web sites and other information resources are widely available to producers today. At the time the CWB was put in place over half a century ago producers had literally no way to access price information outside their local community. Technology and access to information in real-time has completely revolutionized the balance of information power that farmers have compared to the days of pre-World War II.

Between then and now, many farmers have been increasing their awareness of the overall grain markets while others have spent their marketing energies trying to protect the CWB monopoly. Herein lies the divisiveness: some farmers are taking control of marketing using new tools at their disposal because they believe that market analysis works to achieve better prices; others want the CWB to maintain control because they don’t believe that any other tools work to get above-average prices for their crops.

No self-respecting market analyst would ever claim that they can perfectly predict prices in the future, particularly when looking out beyond the next couple of months. Nobody has a crystal ball; that’s the first thing you learn in grain marketing. But there is no question that market analysis works to achieve above-average prices in selling a crop. This includes not just making informed decisions about the direction of grain prices overall, but also in how to extract extra value out of the market from other actions such as the timing of delivery windows, forecasting local basis levels, and on weighting sales towards crops that have relatively less upside potential than others.

If a producer has the expectation that they can’t make market analysis work to achieve better prices, then a random or average approach to making selling decisions is going to work as good as anything. You won’t sell much at the highs, but you’ll also avoid selling too much at the lows as well. However, never before have producers had the ability to take more control of their business and achieve better results through the use of tools that are widely available and easily accessible to anyone.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
It’s easy for producers who are excited about marketing their wheat, durum and barley in new and different ways next year to be highly critical of those who continue to fight the government’s move towards an open market system. The Canadian Wheat Board (CWB)’s leadership and its supporters are getting dragged through the mud these days for gross abuses of power, including doctoring voters’ lists and lying to the public. Unfortunately, such comments are no more productive than the CWB’s demands that the government honour the results of their internal survey.

We need to move immediately past this high-browed blather and start thinking and talking about what an open market for wheat, durum and barley will look like. Some find this difficult simply because they don’t trust or understand how markets function.

The question of how to transition a farm to an open market system can only be addressed once one has a basic understanding of the economics of commodity pricing. For most producers, just hearing the phrase, ‘economics of commodity pricing’ causes them to cringe with hateful memories of their least-favorite courses in university, or it puts them to sleep.

This reaction is unwarranted. Recognizing and responding to market signals is actually much simpler than most of the technology, machinery, accounting, credit, chemical and fertilizer formulations producers are constantly working through. Furthermore, producers already respond to market signals for non-Board crops, which will come through in the same way for wheat, durum and barley in an open market system.

The CWB has done a lot of interesting things over the years, but they have never helped producers make individual business decisions or manage the workload of marketing their crops. The organization has done branding and market development, which will continue in an open market system in a format similar to the Canola Council or Pulse Canada. Price pooling, the other aspect of the CWB’s operations that many producers value, will be available as well, just like it is in Australia.

All that’s required for most farmers to move successfully through the transition to an open market system is a small amount of study in the economics of commodity pricing, just to reinforce their understanding of how supply and demand determine prices. Producers are going to be surprised by how quick and painless this transition is, especially compared to carrying around a fear of the unknown.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
Futures markets have seen another round of strength over the past couple of weeks on renewed concerns about yields. Dry conditions through the last half of the growing season through a good chunk of both the U.S. and Canada has caused analysts to start walking down their production expectations for a number of crops.

The most recent USDA report already showed very tight supply / demand balances for corn and soybeans, something that is only going to get heighted further if the yield estimates get lowered as expected in future releases. Soybeans are especially sensitive to August weather, and the persistent dryness through some key growing regions has increased concerns that the pods will not fill to their potential. The corn crop also continues to shrink in the eyes of most traders.

While these two major U.S. crops are key drivers for all North American grain markets, the early stages of harvest are starting to give some clues as to what our own domestic Prairie crop might look like as well. The one generally watched most closely these days is canola.

On August 24 Statistics Canada came out with their estimate for canola production. Their projection of 13.193 million tonnes is a record, but more importantly, it came in on the lower end of pre-report expectations. The survey was taken nearly a month before even the earliest fields were harvested, so it remains to be seen what the final actual tally will be. But given the variability of crop conditions through a number of Prairie regions, chances are we won’t see yield projections increase from their initial level.

A key part of the canola market is the fact that demand will be very strong again in 2011/12 as well. Our domestic crush usage continues to grow, and export movement will be large again. While canola values will also be heavily influenced by the values of other vegetable oils like soybeans and palm oil, a tight supply / demand balance will help keep values firm.

The supply side of the equation is a huge part of assessing the potential value for all crops during the coming year. There is always so much uncertainty in the months leading up to harvest, something that is particularly the case when old crop stocks have been drawn down to tight levels, as was the case this past year. But in just another two months we’ll know much more about where things stack up, and what that will mean for producer marketing decision the rest of the year.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
Summer is coming to an end and the federal government will be getting back to business soon. One of their early priorities is expected to be tabling new legislation governing wheat, durum and barley marketing in western Canada. Since the federal election in May, the end of the Canadian Wheat Board (CWB) sales monopoly has been widely discussed, debated and deliberated, but no major steps have yet been announced. Here is a rundown of the events of the past few months, and some ideas about likely next steps.

Shortly after the election, Minister Ritz announced that the change would take effect for the 2012/13 crop year. He met with the CWB early in the summer, confirmed the government’s plans to end their monopoly, and asked the Board to start preparing.

CWB supporters including the 8 Directors who control the organization have fought the change. The organization launched its own plebiscite asking farmers if they want the end of the monopoly or not, although the Minister has stated that the results won’t impact the government’s plans.

The Directors hosted town hall meetings to talk to farmers about what would be lost with the sales monopoly. Allan Oberg, the CWB Chair, also launched a blog where regular commentaries are posted regarding the possible negative implications of the government’s plans. Their message to the public has been that the Conservatives’ election promise – to give farmers marketing choice and to maintain a strong, viable pool – isn’t possible.

The CWB’s message to government has been slightly different. They’ve asked for “significant operating and financing capital, regulated access to terminals, assistance in an ownership structure, and other measures”, or a couple hundred million dollars to cover wind-up costs to shut down the organization altogether.

Agriculture and Agri-food Canada set up a Working Group on Transition to help sort out the many side issues related to taking away the source of the CWB’s power and control in the industry. This team of grain industry representatives has spent the summer dealing with such questions as the administration of producer cars, marketing and approval of new seed varieties, and funding the Canadian International Grains Institute and the Western Grains Research Foundation. They have finished their meetings, and are now preparing their final report and recommendations to submit to Ottawa on September 15th.

The organization ‘Friends of the Canadian Wheat Board’, which raises money to protect the CWB monopoly in court, launched a lawsuit that will be heard on Friday, September the 9th. This is also the day that Meyers Norris Penney together with the CWB will release the results of their internal plebiscite.

New legislation is expected to be introduced the first week of October. This would imply that much of the work is already complete and that the new structure is close to being decided. The contents of the bill will not be available to the public until it is tabled.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
When producers have marketing choice come August 1st, 2012, Prairie farmers will gain a freedom to time their sales of wheat, durum and malt barley in response to market signals, which will have a direct positive economic impact on net farm returns. In crop markets that are currently controlled by the Canadian Wheat Board (CWB), the ability to deliver and be paid for crops is dictated to producers, limiting the ability for farmers to time sales according to the results of market analysis.

This is not to say that it’s possible or realistic to plan to sell at the highest price of the year. Rather, producers simply need the ability to sell for good business reasons: in order to lock in their target margin or return on investment (ROI), to manage perceived downside price risk in the market, or to capture the opportunity of a market that is making an interim high.

The CWB system hems farmers in and prevents them from making marketing decisions for good business reasons via two key with non-market related constraints. First, the policy of smoothing delivery over the course of the year, and providing equal access to all producers, usually means that only 20-30% of their crop can be moved off the farm at harvest time. The on-the-ground reality for many is that there isn’t enough bin space to store an entire crop past fall, so being forced to store the wheat forces them to sell other crops, whose prices may be likely to move higher later in the crop year.

Generating cash flow in the fall is another common reason farmers end up forced to sell crops at inopportune times. Here again, the old CWB system imposes a constraint on farmers, by paying only a portion of the value of that 20-30% that producers are allowed to deliver in the fall. Typically, the initial payment is set at 60-65% of the crops’ expected value. Full payment isn’t made on Board grains until more than a year after the crop is harvested.

It’s not uncommon for the CWB to allow only 60-80% of wheat to be delivered in the entire crop year. In these cases, farmers are forced to store and finance a portion of the harvest for over two years. These situations can be overwhelming for individual farm businesses to manage; the storage and interest costs involved dwarfs any value, proven or perceived that the single desk or the government guarantees could ever hope to generate.

There are some relatively new CWB programs that loosen these restrictions marginally, but they don’t work very well to alleviate the storage and cash flow restrictions inherent in the system because the organization has never moved away from a strict policy of mandatory pooling. The Producer Payment Options, Guaranteed Delivery Contracts, CashPlus and other initiatives have only taken a very small step towards offering producers commercial grain marketing options.

Allowing producers the full range of choices in marketing their crops next year will go a very long ways towards improving overall marketing performance and enabling individuals to make better business decisions.

By Brenda Tjaden Lepp, Chief Analyst, Winnipeg, Man.
Over the past few days, three of FarmLink’s professional women grain marketers joined on a study tour of seven women farmers and grain traders from Australia. The trip was hosted by a cash grain brokerage company called Agfarm Australia, which helps farmers sell their crops for higher prices. Over the course of their visits and tours, FarmLink gained some very interesting insights into how voluntary pooling is working in Australia. All of the aspects of these contracts are workable in western Canada.

The Australian Wheat Board (AWB) lost its monopoly five years ago, and was since bought by Cargill. Them, along with Viterra, GrainCorp, Glencore and a few other buyers of Australian grain, all offer voluntary grain pooling contracts to their producer customers. Agfarm’s voluntary pooling contract has some advantages over the others, related to the fact they work solely with producers, and because the company is focused on getting the best possible prices for the farmers who put their grain in the Agfarm pool.

Here’s how it works. Producers can choose from a 5 or 10-month pool, and the pools are run for canola, wheat, barley and sorghum. Grain has to be committed to the pool within about 2 months of harvest. Farmers can deliver to almost any elevator of their choice, as Agfarm has agreements with facilities covering 95% of the capacity across the Australian grain belt (about 300 individual delivery points).

Agfarm Australia’s policy is to sell an equal portion of the crop every month. Their focus is on offering out their tonnage to all their buyers, and extracting the maximum value possible. They don’t hold an opinion about short-term price direction or try to time sales into futures market rallies, instead they work industry relationships, logistics expertise, their knowledge of the local trade and their feel for where and when the best value comes available. Premiums are achievable by accessing markets otherwise unattainable by individual growers and accessing scale benefits.

Agfarm Australia also offers a 3-month pool, which they call their ‘harvest pool,’ because it provides the most cash up front, including an ‘initial payment’ made within 3 days of delivery (Note: standard grower payment terms are 30 days end of week of delivery). Figuring out which of the voluntary pool option to use hinges on the producer’s individual needs and risk tolerance: basically, the longer the pool period, the longer the marketing window giving greater exposure to the market both positive and negative; whereas the shorter the pool period, the sooner they get paid.

The payment terms under Agfarm Australia’s voluntary pooling contract are particularly attractive. On the 15th of each month, they issue a payment based on the previous month’s price. So if you marketed 1000 tonnes of wheat into the pool, and the average selling price was $255/t in the first month, two weeks later you would receive a payment for $25,500 (1000*10%*$255 = $25.50/t or $25500). Each month afterwards you’d receive similar payments regularly; almost like receiving a salary for grain production.

Each month, they send a financial statement to all growers who delivered into the pool reporting sales to date and the performance of the program. The program is finalized prior to the next harvest, enabling growers to evaluate how the voluntary pool performed in the past year before making any decisions for next year’s marketing.