If you priced all your durum in the A contract this year, you’re probably going to move about 65 per cent of it. To ease your cash flow, you could consider taking a wheat board advance on your remaining durum.
Ouch. Western Canadian durum producers, inundated with carryover stock, are facing limited delivery opportunities in soft markets. This season, according to Statistics Canada, producers hauled in the fifth largest crop on record, about 5.1 million tonnes, much of which is average quality or better, but still in the bin.
“As a result of the convergence of good crops worldwide, the total durum supply has gradually crept up,” says PMG AgCoach Roy Erickson. “If the wheat board had sold our durum a little cheaper, a few more dollars could have ended up in people’s pockets.”
The question for farmers stuck with mountains of unsold durum remains: How can I cut my losses and maintain cash flow? PMG has been advised that the board will take only 40 to 60 per cent of the durum contracted. This means a lot of producers will be carrying about 40 per cent of their durum forward. The question then becomes: Sell or hold?
If your durum is a No. 3 grade or lower, or if you’re holding tough or damp durum, you’ll likely want to get rid of it as quickly as possible. “You might consider moving it into the feed market just to get it out of your system,” says Erickson. “It will cost you to dry and store lower grades of durum. With the offering price of graded durum already at or near the price of production, the less you put into the crop, the better.”
If you have high quality durum, consider storing it until prices improve. “If you’re holding a high quality durum crop that’s dry and in good condition, you can carry some of that over and take the chance that it will be worth more next year,” says Erickson. “With lower quality dry durum, you might want to blend it off and move it into a feed location or into the board. You’ll fulfill your commitment that way.”
If you priced all your durum in the A contract this year, you’re probably going to move about 65 per cent of it. To ease your cash flow, you could consider taking a wheat board advance on your remaining durum, which is slightly over half the value or about 60 per cent.
“You can’t take an advance on any more durum than you contracted. You don’t want to, anyway,” says Erickson. “If the board doesn’t call your total contracted supply, which would pay off your advance, then quite likely the advance would roll forward with the durum.”
Be sure to look before you leap into advances. Develop a strategy around how much advance to take. Talk to your advisers, wheat board rep and elevator agent. “Don’t get caught on the wrong side of this situation,” cautions Erickson. “Don’t take an advance on any more durum than what you have placed on contract.”
Say you have 500 tonnes of durum. Take the advance on as much grain as you have on hand. If you contracted only 400 of that 500 tonnes, the board assumes you have no intension of delivering the last 100 tonnes. Therefore, they wouldn’t roll you forward. More likely they would place you in default at the end of the crop advance period, which means you’d have to pay it back in cash.
“That’s the potential pitfall,” Erickson points out. “You want to be careful that you don’t make mistakes that put you offside with the board.”
If you are going to carry over grain, make sure it’s quality durum. Part of your strategy might be to sell all of your spring wheat since it’s at a relatively better price than durum. “Even though you may get more for your spring wheat next year, the upside for durum is potentially greater,” says Erickson. “Right now, durum is discount wheat in world markets, so it’s probably worth more in the bin.”
Durum is a prime example of what happens when the wheat board doesn’t move grain expeditiously. When they didn’t catch the price high this year, the board decided their best bet was to hold onto a whole lot of durum. “The price declined and farmers are stuck with bins of unsold durum and the storage cost and cash flow problems that go with it,” says Erickson “We’ve got a grain marketing system that grew out of the 1930s. Clearly the system isn’t serving our potential.”
On the more bullish side of markets, Agriculture and Agri-Food Canada forecasts a seven per cent rise in Canadian durum exports this crop year. Lower European production is expected to result in an increase in Canadian durum sales to Europe. And maybe low durum prices will entice some end-users to switch from wheat to durum. The name of the game is to strategize your durum holds and sell-offs to increase cash flow and recover production costs.
Gary Pike is president of PMG. PMG provides management, marketing, business-planning advice and coaching to members who represent 1.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.agcoach.caor call toll free 1-877-410-7595.