Maybe you mourned its demise, or maybe you danced on its grave. Either way, five years after the federal government put the Canadian Wheat Board’s single desk six feet under, it’s clear there will be no resurrection. How have farmers adapted to marketing wheat without the single desk? Where are they excelling, and where not? And are there tools they could be using more?
How farmers have adapted
Although Vancouver Island is a long way from the Prairies, Geoff Backman has no problem drawing parallels between ag businesses in both landscapes. Backman’s father was involved in fish farming on the Island, which is very similar to feedlots.
“It’s all feed conversion ratios,” he says.
Combine that matter-of-fact perspective with Backman’s interest in his extended family’s farm in southwestern Saskatchewan, and it’s not surprising he left his childhood home on the Island to study ag economics at the University of Saskatchewan. Today Backman works as a market adviser for Cargill in Fairview, Alta.
Backman started his grad degree in 2012, just as the former agriculture minister Gerry Ritz was writing the last chapter on the single desk. It was a very fresh topic, Backman says, and one that affected his farming family. So, for his thesis, he decided to find out how farmers were marketing their wheat differently after the Wheat Board.
Backman surveyed farmers on how they marketed their wheat and canola between 2010 and 2013, with 295 responses from western Canadian farmers.
One pattern came up time and again. If a farmer already had experience with a marketing tool, they would use that tool even more after the single desk.
“It’s a transfer of experience,” says Backman.
Marketing canola gave farmers “a strong familiarity” with forward contracting, he says, and farmers overwhelmingly increased their forward contracting of wheat once the single desk was removed, making it the most popular marketing tool by far.
Dustin Gabor has observed a similar transfer of experience with farmers.
More than that, they’re using those tools to essentially build pools for themselves, and they’re doing it very successfully.
In fact, says Gabor, farmers overall are capturing a better price year to year now for their entire crop than they did with the Canadian Wheat Board’s pool.
Gabor is affable during our interview near Saskatoon. He grew up on a Manitoba farm, the middle child of three boys and earned an ag business degree from the University of Manitoba before working for a grain marketing advisory firm. After eight years, he started his own company, Grain Shark, and today provides market information and advice to subscribers.
Gabor still helps out his brothers and dad during busy times, he says, although he doesn’t have a financial stake in the farm. “I like to get out there and make sure I’m still in touch.”
And he likes much of what he sees farmers doing.
“There are all kinds of different ways to do it,” says Gabor. Farmers have transferred what they’ve done with canola to wheat. They go to the elevator and set a target or lock in the net price for the day. Or they use basis contracts or futures.
Opportunities after the single desk
Vicki Dutton says the big difference between the single desk days and now is a farmer’s ability to decide when they’ll market wheat and what price they’ll take.
“You may not like the price, but you can make that decision independently, individually,” says Dutton.
Dutton is a grain trader with ADM in North Battleford, Sask., and she and her husband are also seed growers. “That producer who must ultimately make those decisions, in my mind is someone I have great respect for.”
The other big change after the single desk is that farmers can treat wheat as a cash market at their disposal, Dutton adds. In the Wheat Board days, the cash flow didn’t always include wheat because farmers didn’t know exactly when they could sell or what they could get. Now farmers can sell their wheat when they want, provided they can find a buyer.
Gabor says the biggest positive change he’s seen is the ability to target pricing throughout the day of trading, so the strategy of setting targets to pick when futures move up or down is more effective.
“With the Wheat Board, you were stuck waiting until the end of day,” he explains. “Once the markets closed, they would offer a fixed price contract at 3 p.m. that you could sign up for… inter-day targeting is a huge bonus.”
Gabor is also seeing more blending opportunities for farmers, especially this year. “Some companies have actually been taking, say CPS wheat, and bringing it in as a Number 2 Hard Red Spring Wheat.”
Dutton says farmers should be looking for niches in wheat, such as high protein, noting she and her husband have done quite well with high-protein wheat on their own farm. “We choose varieties that have high protein. We try to choose varieties that mature early. We also manage our wheat program. It’s the first crop we seed because we want high-protein wheat.”
But, Dutton cautions, market niches fluctuate, and farmers need to watch where those niches are headed.
Are you missing out on options?
One thing that’s common to North American farmers is that there are some “straightforward tools that producers could use to manage risk and still take advantage of upside,” says Eric Micheels, ag economist and associate professor at the University of Saskatchewan.
It starts with knowing cost of production, Micheels says. Usually the next step is to lock in a part of the crop with a forward contract, although such a move will of course expose the farmer to some grade and yield risk.
Still, forward contracting has proven popular with farmers for a reason. “You’re protected on the downside — you’ve established a price floor,” Micheels says. But what if the price goes up?
That’s where options could come in. (for more, see “Options 101” at bottom)
Futures were the second most frequently used marketing method reported by farmers in Backman’s research, with over half having used them. Options came in third. So why the gap?
“Maybe it’s an awareness issue. Maybe it’s a lack of comfort,” says Micheels. It could also be a cash-flow issue for some, he adds.
Or it may be because of the terminology, and because options contracts seem more complex than futures.
“There are more moving pieces in an options market with the volatility and the time value. And it can be difficult to understand,” says Backman. When the market moves, that movement might not be completely realized in an option, which isn’t intuitive, he adds.
Plus the options market is thin, especially with canola, Backman says. Fewer options trades means it’s possible no one will be eager to buy when a farmer is ready to sell an option, forcing a sale at a lower price.
Backman’s research indicates personality might also come into play with marketing strategies. Farmers who believed they could control the world around them were more likely to increase their use of futures, according to his survey. That makes sense, he says, because selling futures means they’re not waiting for offers from elevators.
Backman’s research also found most farmers had a higher-than-average risk attitude, which indicates they seemed comfortable managing the risks in their business. And the farmers who were most comfortable with higher levels of market risk were more likely to increase their use of options.
That indicates that farmers view options as risky, a perception that Backman thinks is holding farmers back from using them.
Asked whether more farmers could be using options to manage risk, Dutton says: “Yes. Because you can peg that price and there’s usually a limited amount of cost that you pay for that option.”
Yes, there is an up-front price to buy options,“so if it goes against you, it becomes part of your operating cost,” agrees Dutton. But it limits your downside, and limiting your losses is how you make profit.
Gabor is not sure why farmers aren’t using more options (and futures, for that matter). It may be that they’re too busy to focus on those kinds of things, he says.
He does agree that farmers aren’t doing enough hedging.
“But, on the other hand, a proper marketing plan can kind of take care of a lot of that,” Gabor says. “If you are properly forecasting the market and hitting those areas that you need to be selling into, maybe it’s not something that you need to be doing. But if you’re in a position that you don’t forward price, you miss out on this kind of rally, then futures and options are absolutely something you should be using.”
On Dutton’s farm, they do use options, but they do it cautiously, she says. There is a risk, and it takes discipline, she adds.
“If we can achieve from the market what we believe is a return on our investment… then we don’t tend to be as willing to go in and use paper trading (options or futures) to balance it.”
But if the price they get for their wheat isn’t covering production costs, the question becomes how to fill that gap, Dutton says. “And you have to fill that gap with income or it’s a loss, so filling the gap with income becomes part of what we call paper trade.”
Watch those markets
“Markets are very volatile,” adds Gabor. For example, through the summer, Gabor pointed out there were days when wheat was up $0.60 three days in a row, only to plummet $0.50 the next day.
Farmers can capture those higher prices if they use targets properly, but many are so busy they don’t have the time or energy to look at the charts and see what’s happening, he says.
It’s important to follow markets even during the busy seasons, Dutton says. At those times, farmers are usually more focused on the macro picture. But the market may try hardest to pull in farmers when they’re busy seeding, she says.
That generally means a bit of a price bump as incentive. And farmers have responded — Dutton has noticed that farmers are more and more willing to be open for business all the time.
Dutton suggests farmers also ask themselves whether they’re allocating enough money for market intelligence. On her farm, they pay for three or four market newsletters, she says.
“Foresight in marketing is going to give you that one, two, five, 10 per cent profit, which is going to be essential,” she says.
Dutton sketches an example of a seasonal market trend on a notepad. She draws the trends of the year to figure out where they’ll see peaks and valleys. She keeps an eye on droughts and on global weather markets. A drought might not trigger market movement for months down the road, she says. Or it might hit quickly, and pass quickly too.
Farmers also need to understand global supply and demand. For example, North America’s influence on the wheat market is declining, Dutton says, and the Black Sea’s impact is rising.
“They’re offering at lower prices. They’re a factor in everybody’s market.”
Pulses brought a global perspective to the western Canadian farm, Dutton says. But because of the Canadian Wheat Board’s role, that global perspective wasn’t needed in wheat, she adds. “And so that transparency is something that’s evolving in wheat. And people will want to know, in the future, what the Black Sea is selling to their markets.”
Know what grain buyers are offering
These days, Gabor says, farmers can shop their wheat around to compare what grain companies are offering. It’s a benefit that farmers should make sure they’re taking full advantage of.
Dutton says she gets farmers calling her for marketing advice, particularly in pulses. Whatever the commodity, she advises farmers to phone three or four people, then make up their own minds.
Farmers have some choice in how they structure the sale, too. Backman says that most elevators have options beyond the straight sale these days. For example, most elevators will allow farmers to take the basis only. Futures-only is another common option. And most if not all, elevators will allow farmers to target as well, he says.
We’ve had a good wheat run, Dutton says, and so farmers have been able to make money using basic marketing tools. But overall efficiency in the industry is important, she says. “And marketing offers the best avenue to incremental gain that is probably underutilized.”
That incremental gain will become even more important once crop prices slide.
Still, Dutton is confident that farmers will adapt. She has tremendous respect for the intellectual capacity of Canadian farmers, and she’s impressed by the management and marketing approaches of young farmers.
Indeed, dealing with the children of the farmers she used to deal with is often eye-opening, she is quick to say. “Oh my, they are a pretty amazing generation coming up.”
If you haven’t tried options, you should probably give them a test. Don’t make a big commitment, but do give them a test.
That’s the consensus of market watchers in the wake of the CWB collapse.
The main risk with options is financial, says Eric Micheels, economist at the University of Saskatchewan. There’s no grade risk, but there is a premium to purchase the option. There is also an expiry date.
Once the option comes into money, you can execute it, which gives you the underlying futures contract. “You can either hold that futures contract or you can immediately sell it for that profit, depending on what you want to do,” says Micheels.
Or you can sell the option to someone else before it expires in order to recoup the premium.
What’s the ideal scenario for using options?
Geoff Backman, grain marketing adviser with Cargill, says to understand that, you first need to understand the difference between call options and put options.
Call options gain value as the market rises, while puts gain as the market declines. Backman says options are ideal when you can see long-term trends.
For example, as the North Dakota drought built in 2017, it was clear it was going to affect wheat. Call options in Minneapolis “did very well because they were following a run in the price of wheat.”
Backman says a producer might also put in a call on wheat in April and follow the seasonal trend. The price of wheat tends to rise with concerns about yield and quality during the summer, then decline as the yield risk decreases.
Timing is important with options, Backman says, as there’s a seasonal aspect. But the biggest part is talking through the “what ifs.”
What if you put in a call, expecting the market to rise, and it doesn’t? You need to consider what you’re willing to risk and how much you expect to gain, Backman says.
Micheels suggests farmers interested in options start with extension publications from Canadian and U.S. universities. Talking to farmers who have used options could also be helpful, he adds.
“Understand the risks you’re trading into,” says Micheels. “And then try it out.”