What is your storage capacity? What are your cash flow needs? Do you have any income tax issues? What crops did you grow and what pricing options are available for these grains? What is the quality of your grain? What is the market outlook, short term (three to six months) and long term (six to 18 months) for each of these grains?
What type of contract will best help you meet your needs based on your answers to these questions?
You have ample storage to hold your crop. You have no real cash flow needs other than immediate harvest related bills and you believe the markets are going to go up long term. You grew wheat, canola and barley. And, you don’t want a lot of income for the remainder of the year.
Let’s assume you did some pre-sales and/or price protection with options on limited tonnes earlier in the growing season to cover your anticipated harvest expenses and not exceed your income threshold for tax purposes.
Once the grain is in the bin, you can apply for the interest free grain cash advance if you need money to cover the last of your harvest expenses and or to live on while you wait for prices to improve. A cash advance is not considered income when you take out the loan, so it won’t impact your income if you take it out in the fall and pay it back with deliveries in the new year. This would apply to wheat, barley and canola.
You may want to consider some possible price protection using options or futures contracts, just in case the markets don’t improve as you anticipated. (This would only apply to wheat and canola.) You will eventually need to sell grain to sustain your farming operation.
If you are not set up to, or comfortable with trading futures/options contracts, there are other contracts that offer pricing protection and flexibility together.
Different companies offer different versions of a cash contract and/or a deferred delivery contract. They may also include some kind of a floor price or minimum price guarantee clause. You get a guaranteed floor price and the opportunity to play the markets and price your futures at a later date; the grain company gets the grain when they need it to meet sales commitments.
You can always defer the monies for tax purposes, but you need to be careful. Some companies are covered and secured against insolvency while others are not. The major grain companies are all bonded while some independent companies that used to handle only special crops but now also handle wheat and canola may not be. So be sure to ask to see the company’s bond before you do any business with them.
If you are not prepared to sell any grain because you believe the price is going to rise, that doesn’t mean you shouldn’t be doing any marketing. You need to be watching basis levels regularly. When you see an attractive basis, you should consider locking it in for a future delivery date that meets your cash flow needs.
By doing this you establish a delivery period plus you lock in a lower cost of doing business with that company. You still have the ability to lock in the futures price at a later date when you believe the time is right.
Those who would prefer a different method to price average and/or set a price guarantee for their grain will want to consider the revised CWB Pooling contracts available for wheat, durum, barley, canola and yellow peas. (Field peas have now been added to the list for the annual pool.)
You can deliver into the early delivery pool, the annual pool or the winter pool.
The difference between these pools is the length of time that the pool remains open for price averaging and the delivery period.
You need to decide which pool will give you a better return. Are prices going to drop? If so, are you better to use the early pool to take advantage of earlier sales to help keep the overall price higher?
Are prices going to hold and possibly improve over time? Then you are probably better to consider using the annual pool, as it price averages sales over a 12-month period, which would allow you to take advantage of any rise in the markets over that time. If you are not in a panic to sell grain, and you believe markets will increase then you may want to consider using the winter pool, which uses price averaging from sales during the last six months of the crop year (Feb to July).
Once you sign tonnes into either of these pools you are relying on the CWB to do your pricing for you based on its sales, unless you choose the “futures choice pricing option,” which allows you to take more control of your own pricing. This pricing option is available with all three of the pool contracts. The CWB establishes a pooled basis, then you have the ability to lock in the futures price when you think the time is right, based on the futures month you choose to price on.
The Act of God clause or Force Majure protects you so that if you sign up tonnes and then end up short due to production loss you do not have to buy out your shortfall. This clause is a good incentive to encourage you to sign up before the tonnage targets are filled. This helps the CWB know how many tonnes it has to sell, so it doesn’t miss out on any early sales opportunities.
What combination of contracts is going to help you meet your marketing plan? Take some time to answer the original questions and you’ll be able to make better decisions about your needs the combination of contracts you should use †