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That ugly bottom third

Are farms still selling two-thirds of their crops at the worst market prices?

At the very least, the old chestnut that farmers sell two-thirds of their crops is the bottom third of the market does stick in the memory. But is it accurate? Um… maybe.

There isn’t much hard proof either way, and as for anecdotal evidence, it seems to depend on who you talk to, which may in itself be a bit worrying.

In other words, it looks like agriculture is still something of a mixed bag, with a portion of our farms continuing to struggle with market success while others are making substantial gains.

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On that bright side, there’s an emerging consensus that a growing share of farmers are finding ways to capture better prices by taking advantage of the tools and expertise now available to them.

“The key to good marketing is good discipline,” says Viterra’s Peter Flengeris. “By developing a solid plan and sticking to it, farmers are seeing better returns more consistently.”

Flengeris says the credit gets shared by farmers, who are putting more effort into marketing, and by the trade, which is providing better support.

For instance, through its online, secure portal myViterra, farmers can track futures markets and get customized price alerts while also working in-person with the company’s market advisers.

The combination is crucial, the trade says. Farmers have unprecedented access to real-time market information. But, says Flengeris, “Access to more information also means that there’s added pressure to make more complex decisions more quickly.”

But you don’t have to go far to find market experts who think a big chunk of today’s farmers are missing out.

“I was a commodity broker in the ’90s, and I would venture to say there was less than 10 per cent of the farmers — and a lot of them were my clientele — who used futures and options,” says AgChieve president David Drozd. “And I’d venture to say that today, it’s not the largest amount that are using them. It’s a smaller percentage of the farmers out there that are actually using futures or options.”

He reckons farmers by and large are more familiar and comfortable with dealing in the cash market, talking to a buyer and getting the price of grain down to the street level.

Similarly, Richard Gray would be surprised if the adage about two-thirds selling at below average prices didn’t continue to hold today.

“Prices tend to be lower when farmers are selling more product,” says the professor at the University of Saskatchewan’s agricultural and resource economics department.

That’s troubling because, from conversations he’s had, very few farmers use futures and options as part of their marketing plan.

“To the extent these are very useful tools, especially for canola and wheat, there is a lack of sophistication in marketing plans,” Gray says.

Farmers Advanced Risk Management’s president John De Pape still uses the two-thirds sold at the bottom third in his presentations, and he suspects it’s still true, if not necessarily at those exact proportions. His guess is most grain gets sold in the bottom half.

Cargill market analyst Dave Reimann, however, is more optimistic.

“I think farmers are working hard at getting better at this and they are,” he says. “They are more willing to forward contract ahead of harvest, and they are more willing to utilize some of these different contracting solutions.”

Also positive is ProMarket president Errol Anderson.

“I’m sensing there’s more respect for the market, that growers realize a little bit more that profits can be fleeting,” Anderson says. “I like what I see. I can’t see us going backwards in marketing. This business is just too big and it’s got to be respected and traded like a company in downtown Winnipeg or Calgary.”

Of course, farmers have always been sellers of new crop during harvest, which is traditionally a depressed time for prices.

“There has to be crop that goes off the combine just because of cash flow and bin space,” says Anderson.

But he adds this doesn’t have to mean taking below-average prices, thanks to forward price contracts and the use of options.

In his experience, more farmers are forward-pricing a portion of their crop so it can still be moved at harvest, but typically at a much higher level. With, say, a third of the crop pre-priced heading into harvest, that should get a farmer through the crunch of paying bills, put less pressure on their bin space, and allow them to pick away at cash sales when prices rally in the months ahead.

“There’s always that percentage of grain that is unpriced, but if you know your numbers, you just keep selling into those profitable zones, take advantage of basis premiums, etc. It takes the stress out of farming in a big way,” Anderson says.

But what if there’s a screaming market rally that makes those decent forward prices look a whole lot less appealing than they had been?

“That’s where an outfit like us comes in because we buy puts into these massive rallies when they occur,” says Anderson.

Put options give a buyer the right — but not the obligation — to sell a futures contract at a designated strike price before the contract expires. A put option can act as not only insurance against lower prices, but also allow farmers to participate if prices go higher.

Anderson explains he’ll execute a scaled-up put buying program into a rally. Nobody knows what the top of the market will be, only that when it’s reached, it’s going to come plunging down.

“When the market rally finally exhausts itself, these puts sometimes can really turn into gold. In my career, the biggest gains have been doing puts into rallies,” Anderson says. “We’ve seen puts worth 10 times their money.”

Cargill hosts events across the country to teach farmers about tools like options.

Call options, or the right to buy a futures contract at a specified price, can help with farmers who need to sell grain off the combine but are bullish and want to remain in the market, Reimann says.

“There are many, many things we try to work with depending on their exact needs.”

Anderson is a big believer in using a combination of tools.

“There’s times when the cash contract is the way to go, and there’s a time when it’s better to go toward a broker,” he says. “A lot of farms will have a blend, which is great, so they’ll have cash contracts and during more exceptional times, a broker will kick in.”

If a producer has, for example, contracted half his crop and doesn’t feel comfortable about doing any more cash contracts with a grain company, that’s when a broker steps in, using options that don’t have any delivery or production obligation.

For farmers who don’t want to be obligated to any grain company, Anderson’s firm will guard them with options through the growing season, and then when the crop comes off, they can shop it around for the best basis levels.

“But the knock against that is if you don’t have a cash contract, then you may not have delivery space; having a cash contract kind of puts you in the lineup to deliver.”

The companies know, however, that they need to earn their role. Flengeris says, “This is where we feel Viterra adds a lot of value — working alongside our customers as advisers to help them develop a solid plan that gives them confidence in being able to achieve their goals from year to year.”

“Our role is to help them (farmers) use this information effectively and navigate the complexities of world grain markets,” Flengeris says.

Of course, it’s up to farmers to decide whether the companies are providing that value, or whether they can do better on their own.

Either way, it seems many farmers — no one knows the exact number — would be well served by boosting their market efficiency.

About the author


Richard Kamchen



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