The Farm Marketer’s Link

By Jonathon Driedger, Senior Market Analyst, Grunthal, Man.
There are many advantages to taking a longer-term view when it comes to marketing crops. Most will improve overall pricing performance and keep the farm on-track with its goals; others will remove the stress and risk involved with making spur-of-the-moment decisions.

One example of how short-term thinking reduces pricing potential is selling crops at harvest time when the bins fill up. Even before one takes into account seasonality and other factors that could cause the market to rise later in the year, this forfeits the potential for the farm to earn carry in the markets.

When ‘premiums’ pop up or markets change direction, the question of what to do about it can make a seller anxious. This is especially true if a market opportunity seems to come along suddenly, and if the implications of either doing something or not are not easily accessible to the farm’s decision-maker.

Planning and forecasting with a long-term view changes this. In reality, most individual farms (as well as larger organizations including ourselves and the CWB) market on an 18-month window. For all of the grain, oilseed, pulse and special crop markets that FarmLink analyzes on behalf of clients, we produce targets, ranges and general trend forecasts for up to 24 months in the future. The shorter-term ones are obviously a lot more reliable, but we need the longer-term opinions as well, to lay into the marketing plans that house the variables relevant to each individual farm’s situation.

For example, by the time buyers start offering new-crop contracts, we’ve anticipated the price level that they’re going to be available at, determined the profitability that may or may not represent, and based on the up and downside potential in the market beyond that point calculated the percentage of the crop we’re prepared to advise clients to commit. Sometimes the game plan does change on the fly, because market conditions do, but most of the time we act according to the plan.

Otherwise, all that remains in making a ‘decision’ when a new opportunity or risk comes along is making a quick couple of calls to review the plan, then to finalize the details. There’s no hand-wringing, second-guessing or wondering. In our experience, this is a much less stressful, and more successful, approach to helping make your farm more profitable for the years to come.

By Steven Perrin, Farm Marketing Advisor, Rivers, Man.
Since the beginning of June we have seen the November canola futures contract rally from $377.90/mt to a high of $469.50/mt on August 5th, a gain of just over $90/mt. Prices have pulled back slightly off the highs due to the onset of harvest and ideas that the canola crop has improved from the early season weather challenges in most areas, but overall the market so far has stayed firm.

Estimates on Canadian canola production vary widely in the trade, from anywhere between 9.5 million to over 11 million tonnes. Part of the uncertainty is around how many acres were lost this spring, a number which should be captured in the August 20th Statistics Canada report. FarmLink Marketing Solutions’ projection is for a crop size around 10.3 million tonnes, based on expectations that yields on average across the Prairies won’t be able to match the levels of the previous two years. However, it will be difficult to know until more harvest results start to come in, and the past two years have shown that yields can surprise to the upside.

Based on the above production figure, when combined with a carryin from the previous crop year of 1.4 million tonnes, gives a total supply of 11.7 million tonnes of canola in Canada for 2010/11. Our expectation is for domestic crush to increase to 5.2 million tonnes as capacity has grown over the previous year, most notably with the two plants in Yorkton. This in turn forces exports to decline from the previous two years to 5.2 million tonnes as demand is forced to be rationed.

When combining the demand for crush, exports, and some allowance for seed and other uses, the total demand comes in at 10.7 million tonnes. Since this is a greater number than our expected production, the end result is a decline in the 2010/11 carryout, indicating a fairly tight market.

It is possible that StatsCan reports an acreage figure that is higher than what people are expecting, and some early yield reports are coming in a bit better than expected, so it’s possible that the final production figure could end up closer to the higher end of the range. But even if that’s the case, strong underlying demand will absorb whatever canola we produce, which should keep values relatively well supported.

By Annette Hamilton, Farm Marketing Advisor, Dundurn, Sask.
Over the last month we have seen a rally in wheat the likes of which we haven’t seen in a long time. World prices rose impressively during July, with production setbacks in the Northern Hemisphere sending prices to their highest level in many months.

The driving force is production problems in major producing countries. Plantings were cut in the U.S. by over 6 million acres, Canadian production is forecast down 20 percent due to bad planting conditions and excessive water, the E.U. wheat crop is in the grips of drought like conditions, and finally, the world’s third biggest wheat exporter Russia is experiencing the worst drought in 30 years. Estimates of production in Russia are for a 35 percent loss, with the drought in the Ukraine and Kazakhstan also reducing crop prospects in neighbouring regions.

Fund companies found themselves caught short as this worsening crop news took hold of the markets in June, and as they reversed their positions the market gained further momentum. Other investors saw the charts turn higher, jumped on the bandwagon and got the market moving even faster. As wheat futures made new highs, additional new speculative money was attracted to the market.

Wheat futures are now sitting at levels that few dreamed likely even just a few months ago. Producers should take a look at what is out there for programs, think about using this rally to price some of their crops. Even as the market continues to march higher, it’s good risk management to sell little bits on the way up, recognizing that it’s not usually possible to hit the highs.

The CWB has made some changes to their programs this year in an effort to better serve producer’s needs. We at Farmlink Marketing Solutions work hard to understand these programs, and can help develop strategies for your farm to take advantage of these programs and market opportunities.

It will be exciting to see where this market will take us.

By Derek MacLean, Alberta Business Manager, Lorette, Man.
If marketing has you seriously confused, consider yourself normal. It’s no small task to understand what prices mean, learn how to use the various contracting and risk management tools available, and then to craft it all into a strategy that works to maximize profits for the farm. In addition, research suggests that marketing is a hard job for many farmers to begin with.

An article in the November 2005 issue of Country Guide entitled, “Are You Hardwired for Marketing?” suggests the frustration farmers feel is due to an imbalance between marketing goals and personal risk tolerance. Author Edward Clark refers to research done with farmers by Paul Tieger and Barbara Baron-Tieger using the Myers-Briggs personality test.

Tiegers’ book, Do What You Are, identifies the personality well-suited to the production side of farming as a ’sensor:’ one who is pragmatic and accurate; who prefers the real and the concrete; and who works diligently on projects that absorb his or her interest.

According to Tiegers’ research, many farmers are ‘extreme sensors.’

On the opposite end of the spectrum is an ‘intuitive’ personality, one who likes thinking in conceptual rather than in concrete ways; and is prone to analysis. Marketing is said to be a natural profession for intuitive personalities because they enjoy fast-paced, charged environments and thrive on change.

Perhaps this is why many western Canadian farmers sometimes look for external solutions or a ‘quick fix’ to optimizing their marketing performance. A survey of producers released in the spring of 2006 by the Canadian Wheat Board (CWB) reported 63% want wheat marketing to remain the sole responsibility of the CWB, while 40% feel that private grain marketers get better prices. Reading between the lines, it seems everyone wants either the government, or the private trade, to take the responsibility for marketing their crops.

But the fact is, neither type of organization actually bears the same risk as grain producers, making it unrealistic to expect either to always be acting in farmers’ best interest.

This is why taking more control over marketing the farm’s crops, rather than less, is so important these days. The personalities of the various buyers of crops are almost as important to incorporate into a marketing plan as a farm manager’s own personality.

No matter their size or structure, no business is immune to the realities of the marketplace. No buyer, whether it be a multinational, a former pool elevator, or a government organization that sells on behalf of all farmers, will willingly pay a farmer more than the crop is worth, based on the price in its next-use market, less the cost to move it there.

Clarifying your own skill set as a farm manager, and having realistic expectations of the parties on the other side of marketing transactions can go a long ways to responding most appropriately to the price signals they send, and executing your marketing plan successfully.

By Steven Perrin, Marketing Advisor, Rivers, Man.
Grain marketing involves many different decisions, and making them successfully hinges on one’s knowledge of how Canadian grain markets work. It’s also critical to understand what prices mean to the bottom line of your farm operation. Then, getting the most from the markets that you can usually requires using a few different marketing tools.

For most Prairie crop prices, the main influences are supply and demand. Prices tend to be lower when demand is low and supply is high and vice versa, however there are many outside factors that come into play. But apart from using disciplined analysis to respond to market signals, we can’t control much about them, which is why we at FarmLink incorporate farm management issues into marketing decisions.

One of the first steps is to understand the risks related to the volatility of grain prices, determine the level of risk you’re willing to allow on your bottom line. It’s easiest to frame this risk in the context of the farm’s cash flow needs and costs of production. The goal is to figure out, when you want to wait for prices to move higher before selling, if you’re financially stable enough to take on the additional risk.

Another key factor that helps farms understand their risks is having an accurate picture of production costs. The goal of any marketing plan would be not only to cover all the production costs but also to achieve ROI (return on investment) goals. With these in mind, the farmer will be able to view the current pricing opportunity in terms of its ability to achieve their own goals.

Once you understand your financial situation, know your costs of production and target selling levels, the next step is to understand the various pricing options and risk management tools available. There are a variety of contracts in the market that offer alternative ways to reduce or manage the risk of price volatility, including deferred delivery contracts, basis contracts, grain pricing orders and minimum price contracts just to name a few. There are also many futures-based hedging strategies that farmers can use, for example selling futures contracts to reduce the risk of falling prices.

Consulting a grain-marketing specialist is very helpful in understanding and determining the right process to help make your farm more profitable in the years to come.

I’d be happy to chat more about these types of marketing tools, the outlooks for the different crops, or the particular challenges and opportunities you face in marketing your farm’s crops. We’re always looking to work with new producers in the area to make farms more profitable in the years to come. Call Steve Perrin, your local FarmLink Marketing Advisor, to find out more or to set up an on-farm meeting, at 204-761-0267.

By Barry Hutchison, Farm Marketing Advisor, Virden, Man.
As I sit here writing this article, I find myself wondering – like so many others involved in crop production across western Canada – just what this year will bring in terms of yields. It has been quite a year in certain areas. Recently Yorkton received large amounts of rain in a short period of time causing extreme flooding. The Peace is experiencing a drought. The stories go on and on, adding to the stress that the crop is already feeling, threatening to set things back even more.

StatsCan’s last report on June 23rd estimated that there was going to be 17.895 million acres planted to canola this year in Canada. This survey was taken between May 25th and June 3rd and was prior to all the weather problems we have seen in western Canada, and did not take into account the acres that did not get planted or any last minute seeding changes that were made in response to the weather conditions. So there’s not much confidence in these figures.

The consensus is that at least 3 million acres of canola were lost from the initial intentions, and that canola yields are worse than normal. This would be quite a reduction from what we’re used to since the last couple of years saw yields exceed expectations, but in those years we learned it’s a hardier crop showing significant productivity gains due to improved genetics.

In the past six weeks, canola futures have risen approximately $60.00/mt, with the November contract bottoming at $377.90/mt on June 2 up to $435.80 on July 12. The Nov. futures finally broke through the $430 resistance level, reaching as high as $442/mt last week, and look to be testing that level again at the time of writing on Tuesday evening (July 13th).

These sharp gains reflect the market’s response to the sharp reduction in the canola supply. Whether it has been fully factored in won’t be known for another few months, but equally important will be the response of buyers to these higher prices. Will importers walk away from canola at a small premium to soybeans? Or are they concerned today, and looking to start covering their needs just in case canola continues to rally, potentially creating a tighter supply later on?

Our feeling is that the market is pricing in as much of a supply reduction as is known for now, and that it will take news on the demand side to push the market higher, or a new supply threat. Some of the hard-hit areas that seeing an improvement in crop conditions, and others – namely Alberta, southwestern Saskatchewan and parts of southwestern Manitoba, are looking at great potential canola yields again.

But it’s a long ways from the end of the 2010/11 marketing window, and as we wade through it let’s to keep focused on profitability, discipline and risk management.

By Jen Gutfriend, Marketing Advisor, Falher, Alta.
Whoever thought we were over the weather problems for the year is sadly mistaken. As many areas were attending the July 1st festivities, others were preparing for more rain. Last week, communities in the Yorkton, Sask., region received large amounts of rain in a short period of time causing flooding in the area. This adds to the stress the crop is already feeling and will set things back even more.

In the Peace country they are in a completely different situation. Areas of the Peace are showing one of their driest years in history. With last year’s drought there is no sub-soil moisture available to plants and farmers are hoping for rain soon.

The rest of Alberta and Manitoba have had plenty of moisture and now they are hoping for some hot weather to help advance the crops. With the current heat wave making its way across Canada, this should not be a problem.

So what does this mean for supply? Some crops are going to come in with seeded acreage millions below pre-seeding estimates. Some areas are also predicting well below average yields, and some even crop failures.

In the June 23rd StatCan report many numbers were well below pre-seeding expectations. These numbers do not take into account the acreage losses due to weather though. There will remain a fair amount of uncertainty until the final numbers come in next fall.

By Annette Hamilton, Marketing Advisor, Dundurn, Sask.
Wheat futures have come under pressure in recent weeks, reflecting normal winter wheat harvest selling pressure, large world wheat supplies overall and weakness in other crop and financial markets. The Minneapolis December futures contract has dropped, although the decline in the Canadian Wheat Board’s (CWB) Fixed Price Contract (FPC) has been somewhat more muted due to some softness in the Canadian dollar and a very slight improvement in the Basis.

Minneapolis futures, which are the benchmark for pricing the majority of the wheat produced in western Canada, will usually follow the other wheat exchanges, unless there is a problem specific to the spring wheat crop. Harvest is still a few weeks away in the main northern U.S. growing region, which coupled with uncertainty about the size and quality of the western Canadian crop, could create the potential for this market to divorce itself from other types of wheat.

Producers looking at pricing winter wheat through the FPC will need to watch the Kansas City wheat market more closely, as it forms the basis for CWB cash price valuation of this class. Kansas City wheat futures are under pressure due to harvest yields and hedge pressure. The latest reports from the Kansas Wheat Commission regarding 2010-crop yields are in the range of 40 to 75 bushels per acre, which is above expectations. Higher-than-expected protein content in early harvest results is also adding some pressure to the wheat complex overall.

Soft red winter wheat, which trades against the Chicago wheat contract, is also in the midst of being harvested with some concerns about poor quality. Mills have raised concerns about the quality of certain varieties of Soft Red Winter wheat in Ontario as well, specifically regarding low gluten strength which can cause problems during baking. In western Canada, it is the Soft White Spring wheat class that trades against the Chicago exchange in CWB pricing.

Producers in western Canada are dealing with many issues in this year’s crop, including drowning out, disease and lack of heat to jumpstart crop development, in various regions of the three Prairie provinces. The Canadian Wheat Board estimates that Western Canada spring wheat crops are 18% unplanted, a figure that is not going to change now with crop insurance deadlines passed.

Yield potential is a big unknown right now, but at the end of the day one has to realize that the size of the western Canadian crop isn’t going to have a huge impact on prices. Certainly it was a factor being watched closely by the trade in early June, and the release of the CWB’s smaller-than-expected crop size estimate on June 11th caused a spark that helped drive futures temporarily higher. But the swiftness that those gains were erased is a good indication of the temporary nature that local weather has on U.S. futures.

By Jeff Ross, Marketing Advisor, Virden, Man.
Especially during the growing season, it’s tempting to focus market opinions on what’s going on in our own back yards. But crop conditions, news and events in other parts of the world always play an important role in the prices we see at home, so let’s review what’s going on in important cropping regions abroad. The following collection of comments was sourced from companiesandmarkets.com.

In Argentina , the Agriculture Ministry recently approved the export of more corn and wheat. The minister also reaffirmed the government’s commitment to supporting small and medium-sized producers. Analysts are forecasting a record 2009/10 Argentinian soybean harvest following the drought-hit harvest of 2008/09. Abundant rainfall has promoted a bumper crop; however, the harvest has been threatened by a dramatic increase in fungal diseases and rot, due to the warm, humid conditions and recent flooding.

2010 is expected to be a bumper year for soybean production in Brazil as well. Good rains in late 2009 and early 2010 should help yields rise considerably from 2009 ’s output. However, the forecasted large increase in the crop in Brazil and other major producers has already started to put downward pressure on prices.

Australia will see increased wheat export opportunities in the medium and long term, particularly as growing importers in the Middle East purchase cheaper Australian wheat in order to manage their grain import bill, and Australia receives greater access to regional Asian markets through the ASEAN Free Trade Agreement (AFTA).The country will also benefit from the recent fall in the Australian dollar, which has declined sharply against the US dollar since March 2010.

While France remains an agricultural powerhouse, several sectors are troubled and production declines are forecas. Grain prices are low, with barley prices still under intervention levels and wheat prices also threatening to drop below the threshold. While this situation should benefit livestock farmers, high land and energy costs and belt-tightening by consumers means we are forecasting declines in poultry, beef and pork production.

Grain production in Germany now looks set for a poor year in 2010. Cold, wet weather over the winter has pushed yields lower in cereals and a spring frost has hurt barley production. Bumper crops in 2007/08 and 2008/09 have seen stocks rise. Demand for German barley on the export market is weak owing to bumper crops by other major producers. This will see intervention purchases rise owing to the low market price.

In Poland, a new law on genetically modified organisms set for consideration by parliament does not place an outright ban on GM crops, but it will make planting them prohibitively difficult and amount to a de facto ban.

Less favorable weather means the Russian grain harvest for 2009/10 will be down across the board following a bumper 2008/09 season. Wheat, corn and barley production are all set to plummet.

The United Kingdom agricultural sector has benefited over the past year from continued weakness of the sterling. This has made exports of UK agricultural products more competitive on the world market. It has also raised the price of imported food, particularly from the euro area, giving a boost to domestic producers. Another benefit of the weak pound is that it has seen the value of EU subsidies, which are priced in Euros, increase. The increased confidence this has brought could lead to a rise in grain production in the coming year.

By Steven Perrin, Marketing Advisor, Rivers, Man.
Price volatility is increasingly challenging for Western Canadian grain producers. We have always dealt with prices going up and down, but lately it’s seemed that price volatility is taking on a new meaning, especially compared to 5-10 years ago. Measuring that volatility and finding marketing strategies to manoeuvre through it will determine who has a sustainable bottom line in the years to come.

In most crop markets, volatility stems from three different aspects of price discovery. For crops with a corresponding futures contract, this constitutes the main portion of the final prices farmers receive. Outside, non-commercial speculative interest in futures in recent years has been a major cause of increased volatility.

In futures-traded crops there is then basis volatility, which in the case of canola is increasing as we are in the midst of a major shift from an export to more of a domestic consumption focus. In markets where the futures are denominated in U.S. dollars, the basis has shown widening swings because of a highly volatile Canadian dollar. In markets that don’t have a futures contract behind them, the cash prices that are backed off from end use markets are also greatly impacted by exchange rate volatility, because the majority of the buying is by non-Canadian companies.

In 2001, the Canadian dollar was hovering under $0.65US. After that it rebounded and gained value until November 7, 2007, when it topped out at $1.10US. In 2009, the Canadian dollar bounced between $0.77US on March 12, 2009, and $0.93US on June 1, just two and a half months later! It fell back to $0.86US by July 8, and then turned around again, topping out at $0.94US less than a month later.

Now, less than a year later, with the dollar again hovering around par - but still in a 5-point range - exchange rate volatility has become the norm. That it is related to financial market uncertainty and the threat of economic crises around the world makes it an even more unpredictable force. But its impact on crop prices is not going to go away, so we have no choice really but to keep on top of it.

For instance, as a general rule, when the value of the US dollar goes down, it acts as a stimulus for futures prices. As futures prices rise because the US dollar is losing value, typically the Canadian dollar is gaining value against the “greenback” and cash basis bids tend to erode as a result. There are various aspects to this “institutionalized” volatility in the foreign exchange component of our western Canadian crop prices.

The challenge for producers is to manage this risk within each cropping and marketing year. The more aware of outside market influences you are, the better you can market your grain successfully, which will put more money in your jeans. At the end of the day, prices will continue to go up and down, so managing that risk will be a constant.