Farm operators, like any other businesses, need to have some sort of revenue model, based on achievable prices, timing those inflows of money to come before the periods when expenses need to be paid. Having worked with farmers for nearly three decades as they market their crops, I’ve seen a few common issues that producers need to keep in mind as they plan their sales for the year ahead.
Grain producers need to appreciate that we’re participating in a global market.
Too often people develop their perception of the grain markets based on crop conditions in their own small production region, and it often leads to unrealistic expectations of price. Last year, the world produced 736 million metric tonnes of wheat. Canada’s total production of just over 29 million tonnes (Prairies included), only represents 4 % of the global wheat supply. (We are just a hair bigger than Pakistan’s 27 million tonnes of wheat production.) Ontario produces a little over 2 million tonnes of wheat each year, so regional issues with winterkill really isn’t capable of moving price by any more than the freight cost to bring wheat to this province from somewhere else.
Over the past month, we saw a very clear example of this in corn pricing. In early May, when it looked like North American corn acres were going to be higher than last year, corn prices were based on exporting North American corn to markets in other parts of the world. As May unfolded, and the wet field conditions limited corn planting, the prices rallied to the point where new crop corn was worth a value based on importing corn from other production regions to meet domestic demand and at those levels the price rally stopped. The export value and the import price essentially create the bookends within which our grain prices can move. The height of the bookshelf is established by the global, not local, supply and demand situation.
The Canadian dollar exchange rate makes a massive difference in the gross farm income for Canadian agriculture.
We participate in a world-wide market for agricultural commodities which trades primarily in US dollars. Certainly the prices of grain and oilseeds are going up and down every day, but the variability in price for Canadian farmers is even more volatile as we convert those fluid values into Canadian dollars using a moving exchange rate.
If the Canadian dollar trades in a typical window between US $0.72 and $0.80 over the course of a year, it would create a price swing of $0.75/bu ($27.55/mt) in wheat and $1.30/bu ($47.76/mt) in soybeans. Anything that can propel price swings of more than 10 % is well worth watching, and if we can learn to capitalize on those exchange rate fluctuations, it can make a tremendous difference in net farm income.
Basis contracts are too often misused by Ontario farmers.
Having a set of grain contracting tools is like having a set of screwdrivers in your toolbox. Each of those tools is for a different situation, and if you try to use a Phillips screwdriver on a Robertson screw, the result will not be successful. Due to the rules established by the Ontario regulations of the Grain Financial Protection Board, farmers in this province receive an advance payment when they put grain on a basis contract, but I’m not aware of any other geographical jurisdiction in the world where that is required. It seems that farmers who aren’t happy with the price, but need to move some grain, or don’t want to pay storage and wouldn’t mind some cash, sell grain on a basis contract as the decision of not making a decision. The actual mechanics of a basis sale is that the grain has been sold, and the farmer has essentially bought back futures contracts. The act of rolling that futures position in a carry market costs as much or more than storage.
The correct use of a basis contract for a Canadian farmer is to lock in an advantageous exchange rate when the loonie is at a low, but we are waiting for the futures portion of price to rally. Ideally, producers using a basis contract should also know which futures rally they intend to hit, and have strike pricing orders in place to flat out the basis contract when they got into it.
Know what each crop is worth in the marketplace, and be prepared to sell it when the bid reaches that price.
There is an old saying that people’s decision making is driven by either greed or fear. The shortcoming in that situation is that greed and fear are emotions, and successful business runs on rational, thoughtful, decision making. Farmers need to study the marketplace thoroughly enough that they know what their crops are going to be worth, and have the discipline to make sales when the bids are within the achievable highs.
People who aren’t certain what the achievable highs are tend to miss them motivated by the greed that it could go higher, or sell the lows out of fear that it could go lower. Developing the capacity to discern how high the market could go, within the current global marketplace, and when to sell are key in managing a successful business.