An ugly day for farming as grain prices drop
By Saskatoon Leader-Post
The US financial crisis is hitting a lot of people hard, but farmers are having to juggle the volatility of commodity prices with the ever increasing costs of inputs, requiring a higher level of long term management skills, reminds columnist Kevin Hursh.
October 1, 2008
For most Canadians, the U.S. financial crisis hits them in their mutual funds.
While it's no fun to see the value of your investments plummet, mutual funds are typically considered long-term investments and people are advised not to panic.
It's only a loss if you sell. The overriding wisdom is that markets will eventually rise again.
For grain producers, the impact is more immediate.
In the big market downturn on Monday, grain prices plunged. It was an ugly day for grain futures markets and this was on top of dramatic price declines over the past two or three months.
Unlike a mutual fund, grain sitting on the farm is not a long-term investment. It needs to be turned into cash over the short to medium term to pay this year's bills and start buying inputs for the next growing season.
Grain market analysts long for the days when they could do supply and demand projections and make reasonable price predictions. Grain prices in recent times are more tied to the overall economic outlook than to their stocks to use ratios.
While a lot of farmers love to hate the Canadian Wheat Board, it has actually helped insulate the Canadian grain trade.
Insiders say that without the CWB around to finance inventories of wheat, durum and malting barley during the volatility of the past year, many grain companies could have been in financial difficulty.
Many observers also point out that declining grain prices have changed the rules for how producers and the Canadian grain trade should be marketing products.
As farmers, we often try to market our lowest quality grain first. This year, for producers filling existing contracts, that's creating big problems.
Producers who locked in prices earlier in the year typically have much better contract prices than what you could get now. For that reason, many buyers in countries around the world are looking for any excuse to get out of their contracts with Canadian exporters.
On many crops, grading parameters are clear cut. On other crops, there's a multitude of grading factors and some of them are open to interpretation.
Farmers deal with crop processors and exporters that have facilities hours away. While that may feel like a disconnect, consider dealing with a customer half a world away who speaks a different language, has a different business culture, and a different set of morals.
If a buyer in India rejects a cargo of Canadian field peas, it isn't easy to get the issue sorted out. Thus, sending a product that is in any way borderline for grade is putting Canadian exporters and processors at risk.
Sending the worst quality first might work for a producer when the market is rising. The buyer won't want to reject the shipment because it will mean re-buying the product at an even higher price.
In a falling market, the whole industry will be better off if producers send their best quality first, especially when filling high priced contracts.
Unfortunately, there's a disconnect between farmers and end-use buyers for most of our commodities. This is true in beef, it's true in CWB grains and it's true on all the non-board grains.
As producers, we typically don't deal directly with the ultimate buyer. It's hard to understand how ruthless international business can become.
However, we do want to keep good relations with our crop buyers and processors here at home.
Imagine the reaction from a Canadian specialty crop buyer if a producer ships borderline product to fill a contract and then sends higher quality product later in the year. That's not a good way to establish a business relationship given the current market realities.