Without a functioning futures market, price discovery in the pulse market is an educated guess at the best of times.
Add to that the fact that the industry is also fragmented — each pulse crop is made up of several categories and types, each with its own supply and demand dynamic — plus the fact that pulses are relatively small crops grown in very concentrated areas, and you’ve also got a recipe for extreme market volatility.
In other words, pulses are crops where risk reduction strategies are absolutely essential, and seemingly impossible.
It’s not all bad news, says Jonathon Driedger, marketing adviser with Farm-Link Marketing Solutions based in Winnipeg. As the summer’s sky-high lentil prices attest, volatility can mean both highs as well as lows.
“Transparency is by far the biggest challenge when marketing pulses,” Driedger says. “Accurate information isn’t always available.”
From the supply perspective, smaller total acres planted to pulses mean larger margins for error when depending on Statistics Canada’s acreage and production reports. As well, because the markets are smaller scale, poor crops and bumper crops can have huge impacts on prices in a short period.
Tracking the demand side of the equation can be equally tricky. “Many of these crops are sold to places where there isn’t a lot of publicly available information, such as India or Pakistan,” Driedger says.
Liquidity within the market can also be a struggle, though this isn’t exclusively a pulse industry issue. Still, when part of your marketing strategy is to move a certain amount of inventory during a specific time, this may coincide with a time when buyers aren’t in the market, potentially leaving you high and dry.
PUTTING IT ALL TOGETHER
Developing a marketing strategy in the face of such unknowns and with the threat of such volatility isn’t easy, but there are tools to manage price and production risk. Even those tools need care, however.
For example, while production contracts are a great way to manage price risk, they can actually increase your risk if they don’t contain an act of God clause to let you out of the commitment to deliver if you don’t get a harvest.
Carrying a contract without the clause could come back to haunt you in two ways. First, coming up with the production to meet the contract may be difficult. If your fields are hit with poor growing conditions or hail, it’s likely other crops will be too. Second, settling on a fair market price for the lost production can be extremely difficult because of the lack of price transparency in the market.
The pulse market is typically one of feast or famine. “When bids pop up and buyers start calling, it can be a good signal to sell,” Driedger says. Because there are few buyers and processors, farmers need to be more opportunistic when marketing than bigger acreage crops.
Jeff Jackson, sales manager for Wigmore, a 37,000-acre farm that also runs two Saskatchewan processing plants and several input dealer locations, suggests farmers account for at least two major variables before developing a marketing strategy: storage and cash flow.
“You have to take stock of just how much production you’re set up to store, since that will determine how much you need to move right off the combine,” Jackson says. After that, there are always cash flow demands that may also dictate when and how much you sell, whether prices are attractive or not.
Planned selling increments, a strategy advocated by both FarmLink Marketing Solutions and Wigmore Farms, can also help to manage cash flow and reduce price risk. “We usually advise our growers to break up sales in two, three or more increments throughout the year,” Driedger says.
“You want to avoid pushing sales when buyers aren’t interested,” Driedger adds. “It’s like pushing on a rope, and it can mean having to take deep discounts to move product.”
Jackson notes that keeping up to date with what India’s crop looks like, for instance, or how Turkey’s first harvest is shaping up is beyond the reach of most farmers.
“This is where having a good relationship with processors, buyers or brokers can make all the difference,” Jackson says. Even then, choose carefully. When your “experts” have closer contact with the end-user, they’ll usually have more informed opinions on demand, potential selling windows and pricing.
Driedger agrees, saying the telephone may be your best ally when doing your own price reconnaissance. Reliable information is a challenge so the closer you keep in contact with brokers, buyers and dealers the better.
“Picking up the phone and calling these guys on a regular basis is a good idea, and might even make you a few cents extra since, on any given day, one buyer may be looking to fill a hole while the other guy may not have any immediate business that needs to be covered,” Driedger says.
Reading and buying newsletters can help develop an overall market picture, Driedger says, but he adds that things change quickly and any information older than a week or two may no longer hold true. “There are some good newsletters out there that offer some insight or opinions, but you do tend to get what you pay for. Free isn’t always a good thing,” he says.
“Given the pulse market’s nature, anything other than daily information might be stale,” Jackson adds. “I encourage farmers to call me, or other marketers, and ask for opinions. Sure, we’re not always right, but we may be the most up to date on what the world is thinking or on what competing crops look like in other parts of the world.” CG