By Connor Lynch and Patrick Meagher
OTTAWA — The 2005 harvest was not a happy one. Prices had slumped all year and as many as 50 per cent of producers waited for better prices that never happened. They hadn’t sold any grain in forward contracts and by the time the grain was in the bin it was too late. They spilled red ink, took their lumps and didn’t talk about it.
Moose Creek farmer Alain Leduc then said that he figured most producers did not know when to pull the trigger. “The majority of farmers are not protected,” he told Farmers Forum. “They’re just gamblers.”
Some learned their lesson and developed strategies to market their grain. Over time, prices also got better. Farmers have since seen record yields and record prices. And crop gamblers are still out there.
Many farmers still wait until harvest to sell their crop, said Grain Farmers of Ontario grain merchandiser Marty Hibbs.
“Forward contracting is what most guys already do,” Hibbs told Farmers Forum at the Eastern Ontario Crop Conference in Kemptville Feb. 14. “They either contract it out to an elevator or (Grain Farmers of Ontario). That’s the most simplistic way. The problem is that they usually do it at harvest time and the problem at harvest time is that’s when the pressure is usually the worst on the market because that’s when all the crops are coming in.”
The worst of the gamblers are what Hibbs calls Texas hedgers. It’s reasonable that farmers tend to be bullish on price or they wouldn’t be farming, he said. “But a lot of clients I had were bulls that actually wanted to speculate in the market besides having their hedging account.”
Last year he had a long-time client who would not sell grain at a good price because he was determined to get a price even higher. “Some people dig in their heels,” Hibbs said. “(The price) was absolute top of the market and he missed it. I tell people, when you are close enough, is it worth losing for the sake of a penny or two (per bushel)?”
Parrish & Heimbecker grain marketer and crop farmer Steve Kell said that for the most part, yes, farmers still tend to gamble with their crop. Only about 15 per cent of his clients have a solid marketing plan and the discipline to follow it closely, he said. Otherwise, growers are largely just going with their gut or selling when they need money.
Strong grain markets have made that possible. Good prices means that even without a really solid plan, farmers can make money. “There are people doing okay entirely by accident,” said Kell.
But if grain markets take a downturn like they did back in 2003 to 2008, it’ll separate the good marketers from the improvisers very quickly. “There’s plenty of reason to expect it’ll get trickier,” he said. Worldwide supplies are up and interest rates can’t possibly get lower. “There’s a pretty clear warning on the package that if you don’t get your act together pretty soon, it could be punishing.”
If market conditions get worse, farmers with a plan will still be in business but farmers flying by the seat of their pants will be selling their land at auction.
Kell cautioned growers to avoid the trap of cost of production. “You need to know that, but more importantly you need to know what the market will give you,” because the market doesn’t care about your cost of production. Look at factors like worldwide supply and demand and stock-to-use ratios to keep price targets honest. “If you want to sell wheat for $6 a bushel but the market likely won’t go above $5.50, having a target of $6 doesn’t make sense. That’s not a plan.”
Some farmers have a plan that includes gambling. Menard and Sons grain elevator operator and crop farmer Andre Menard north of Winchester said that about 90 per cent of his customers forward contract to cover production costs, then sometimes gamble on the rest. “Forward contracting the cost of production, your machinery, then gambling with the rest; that’s smart business to me,” he said. Banks are pushing futures contracting but loans often have a string attached and require a contract in place.
The only people really playing in the market are the hobby farmers, Menard said. “Real farmers, with expenses, forward contract.”
The farmers that Menard works with are forward contracting as early as January and many sell more beans during the May price rally.
Vanden Bosch Elevators owner Greg Vanden Bosch, at Chesterville, said that he’s seen a significant decline in farmers gambling with the markets. Less than 20 per cent of his customers are going into harvest with nothing sold, and about 50 per cent are forward contracting according to his recommendations.
Most of those are contracting next year’s crop when they’re harvesting last year’s, or in early spring ahead of planting that year’s crop, he said.
The biggest obstacle? “They just don’t know what’s a good price,” which makes them hesitant to pull the trigger ahead of time. To ease the pain, Vanden Bosch recommends selling a portion of the anticipated crop over time as price rallies to smooth out the average price farmers get. The key thing to avoid is contracting everything in one fell swoop. “Everyone wants to hit the top but nobody does,” he said.
Cash crop and dairy farmer Norm Tinkler at Inkerman said that he forward contracts about half his crop. “I don’t think there’s too many that gamble on not contracting crop ahead, taking a basis out; it’s too much of a risk if you don’t take something you’ll get a profit on.”
Gambling to one man is not gambling to another. Kell goes as far as saying that forward contracting isn’t a marketing plan without looking at market forces. Growers are largely still just taking prices in advance contracts that sound good without knowing which way market forces are pushing prices.
There are farmers out there that make use of tools like stock-to-use ratios, and look at factors like worldwide supply and demand, Canadian dollar projections, and days-of-use (how much of the growing season is left over after harvest) to figure out what’s a reasonable price to expect for their corn and soybeans. Then they set price targets and sell once they hit them; not above, not below. But these producers are the exception to the rule, he said.
Gamblers abound in farming because farming is inherently a gambler’s sport, added Kell. “If you were particularly (obsessive-compulsive), you wouldn’t be a farmer. It’s really hard to control all the variables. I think that there’s an enormous amount of gambling going on.”
