More eyes are on Cargill with the looming end of the CWB’s single desk. In this exclusive, Cargill national grain marketing manager Tyler Russell shares the company’s hopes, and its advice for growers
While some farmers are heralding the end of the CWB single desk, others are now dreading selling wheat and barley into an open market. But what all farmers need to realize is that the fundamentals of wheat and barley marketing have not changed.
End-user demand for wheat and barley in the world has neither gone up nor down with the end of the single desk. There is still demand for wheat in the same markets that the CWB has always been selling into, and Canadian wheat growers will still compete with wheat growers around the world for those markets.
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The only real difference is there are now multiple sellers competing to sell Canadian grain into those markets where before there was only the CWB.
In ongoing, town hall style meetings, Tyler Russell, Cargill’s national grain marketing manager, compares wheat and barley marketing to a three-legged stool. He tells wheat and barley producers that to be successful in an open market environment, they will need competence in three facets of marketing.
“Producers will need to know the market direction,” Russell says. “They will have to understand their individual marketing situation, and they will need to know and be able to use the risk-management tools necessary to participate in the market and manage the market risks.”
The challenges for wheat producers
Even if you know your production capabilities and have minimized your risk through contracting, there is still a lot of uncertainty going into the 2012 crop year.
“One of the reasons Canada has gained a reputation as a premium seller is because of our ability to grow top-quality wheat coupled with a highly segregated grading system which enables a buyer to source an exact quality of wheat,” Russell says. “However, we do not know if this multiple-grade system will or can be maintained under multiple sellers.”
Furthermore, traders have no way to hedge quality and protein, so it is likely that grade and protein discounts and premiums won’t be known until post-harvest, Russell says. While pricing opportunities may appear good now for high-quality wheat, there is no way of knowing what the end price may be if a grower cannot produce the contracted grade or protein.
“We do not know how rail allocation will be done or what the costs of rail freight might be,” Russell adds. Railways will likely look for efficient turn times on their current fleet before they throw more cars, power and crew at moving grain in an open market, he says.
In this respect the railways are very much like a farm that is always trying to maximize equipment before investing in more iron, Russell says. “Board or no board, there are still mountains between the Prairies and the Pacific. There will still be -40 C winter days. And we’re still going to have avalanches in the Rockies and rain in Vancouver.
“The fact is, Canada must push western Canadian grain production through one of the world’s smallest commercial pipelines. Those that know what they have and can get the right grain to the right boat at the right time will probably get more rail allocation.”
“We also do not know the impact the addition of wheat futures on the Winnipeg ICE exchange will have. The contract has been designed with significant input from both commercial and financial users. Hopefully the contract can attract enough volume and liquidity to be an effective risk-transfer mechanism for the industry. A sound commercial contract is a good base but there has to be speculative involvement to make the contract effective. The Minneapolis Grain Exchange (MGEX) has already announced a foreign wheat delivery option for the contracts it offers so the impact of a Canadian futures contract may be minimal. Time will tell.”
Look for the educational opportunities which will enable you to market your wheat and barley crops in an open market, Russell suggests. Growers may also want to consider employing the services of a consultant, marketing specialist, or your preferred grain company to assist and guide them through the transition.
The market
Understanding the market means much more than simply being able to read a chart or obtain the daily price, says Russell. Until now, wheat growers have simply relied on the CWB to sell what they grew. But without the single desk, it will be much more important for producers to grow exactly what the end user wants.
Growers will have to decide before planting which market segment they will target and select a variety and the agronomic practices which offers the best chance to meet the specifications a buyer is looking for. “We must still sell into the same markets the CWB was selling into,” says Russell.
Going forward, grain companies will need to know why each country buys Canadian wheat, what quality specifications they are looking for, and what premium and price structure is available with them. Growers must realize that not all countries or end users have the same demands or specifications.
We must also recognize that when there is excess supply, competition to make a sale can be fierce. On the other hand, when a commodity is in low supply and high demand, premiums or higher prices are often obtained.
Unlike canola, where nearly all production is graded number 1, wheat is highly segregated by grade and protein levels. Grain companies must supply an exact quality to meet the specific needs of the end user. Growers living in areas where 1 CWRS high protein wheat is consistently harvested can likely target the premium Canadian, U.S., Japanese and niche markets. They can also supply buyers targeting markets seeking high-protein milling wheat to blend with lower-quality wheat grown locally or purchased from low-cost suppliers like Russia.
However, if you live in an area where 3CW low-protein wheat is typical and top-quality wheat is an exception, there may be better profit potential in growing higher-yielding feed wheat varieties for local feed and ethanol markets. The risk of targeting a premium market and not harvesting a crop that meets that market’s needs likely means you will be competing to sell your wheat in markets serviced by the low cost producers of the world.
Risk management
Make no mistake, there is a lot of global competition. Russell points out the average annual world wheat trade is about 130 million tonnes. This overshadows the 13 to 16 million tonnes of wheat that Canada typically exports each year.
Russell also warns growers against counting too heavily on shipping large quantities of wheat into the U.S. spot market. Canadian growers often believe that the higher spot prices offered at northern U.S. elevators are an indication that a lot more Canadian wheat is needed and wanted in the U.S. marketplace.
In fact, the total U.S. domestic market for spring wheat is only about seven million tonnes, which includes everything from seed to feed to flour mill needs. In a typical year, Canada has shipped about one million tonnes of CWRS south — not the two to four million tonnes that farmers often think. Even if we could double our wheat exports to the U.S. it would still leave 11 to 14 million tonnes that must be shipped offshore.
Some growers may also be considering switching to growing winter-type wheats (which includes CPS), hoping to compete in the U.S. winter wheat market. Unfortunately, the long term average protein for the Kansas winter crop is well over 12 per cent, a good one per cent higher than the protein levels of western Canadian winter wheat.
Every farm has its own cash flow needs and its own breakeven price. It is critical growers know at what price wheat is profitable on their farms and when sales must be made to meet cash flow needs.
The other factor growers must pay more attention to is knowing the quality of the crop they have in the bin. Unlike other wheat exporting countries, most of the western Canadian wheat production is stored on-farm rather than in commercial storage.
Individual situation
Unless grower have accurately sampled their production, had the sample graded, and shared the information with buyers, it makes it very difficult for a trader to arrange a sale to buyers that are purchasing on the basis of grade and protein levels. Second, compared to our competitors who already have their wheat in export position, it takes a lot more co-ordination to source specific quality of wheat to meet a sale when the grain is stored on farm.
To be competitive, farmers and the grain trade must get a better handle on what is in farm storage and be ready to move the grain on relatively short notice.
Likely the biggest impact farmers will see in an open wheat market is increased volatility in prices and basis levels. CWB pooling and averaging hid the volatility in wheat markets from Canadian growers. In an open market environment, each farm will now bear the risk of rapid price and basis movements.
According to Russell, volatility is a function of market forces. Multiple grade segregations in wheat, many sellers, and highly differentiated demand results in many moving parts in the wheat market. As a result, volatility is much higher in wheat than in other crops.
While most growers look at volatility as risk, Russell points out volatility also means opportunity for growers. The key is to know and use the tools available to manage volatility and risk. Growers who can do this will be rewarded.
“Relative to other countries, commercial space and storage is very limited in Canada,” Russell says. “There will no longer be delivery calls to allocate delivery. Going forward, growers need to consider contracting their production to ensure market and delivery opportunities.”
While this seems straightforward, it gets much more complicated when you realize that there could be 10 or more different types of contracts available by fall. Growers will need to learn what each type of contract offers, and especially, what the right time to use each contract is. CG
