In my last column, I discussed how total grain production and total grain exports have not increased dramatically over the last five years. So why are grain companies building new facilities over this same time period?
Grain handling is a volume and numbers business. If grain companies don’t handle the volume, they need to “change the numbers” so they net out profitable in the end. But how do they do that if someone else is controlling the sales and handling fees?
It started back in 2012 with legislation that gave the grain companies control of their own destinies in the world of grain handling on the Prairies with the abolition of the Canadian Wheat Board (CWB) Act.
Before 2012, the CWB would sell the grain and determine what to pay the grain companies to handle your grain, and the balance after costs went back through the pools to producers.
Now the grain companies sell the grain and can set and flex their own handling fees up to government/industry set maximums. This means the grain companies take any profit or losses made on the sale plus they get their self-determined handling fees and keep it all and offer you a fair market value for your grain.
Now this is where basis comes into play. Having been in the grain-buying industry for 20 years and then work for the CWB for five years and now as an independent marketing consultant for the past 14 years, I can tell you that basis levels have changed somewhat since 2012 to today — and not in favour of you, the producer.
Back in 2006 when I started my consulting business, I can remember doing marketing strategies with producers and setting canola basis targets and hitting them constantly at levels under -$10 per tonne. In today’s world, what I would call a good basis would be a number under -$20 per tonne, and that is not near as easy to hit now as was a -$10 back then.
It is similar with wheat basis. Back then a good basis was in the +$50 to +$60 per tonne range and now a good wheat basis ranges in the +$30 to +$45 per tonne range.
Changing the numbers
Production on the Prairies is not going to increase dramatically enough to enable all of these facilities to be able to turn their facilities eight or 10 times a year. In order for them to make money, they need to make a little bit more on every tonne they handle so at the end of the year they make the same or more profit.
If total deliverable volumes on the Prairies don’t increase over time, you can expect the cost of doing business will, as shareholder and corporate profit expectations will demand it. If we have years of lower production, you may see some better basis levels as grain companies compete harder to get their hands on the fewer tonnes that are available, otherwise expect basis levels to remain static.
Before committing to a contract, ask about handling and cleaning charges as they can vary widely between companies. If you know what different companies charge, you can use that as leverage to try to negotiate a better price.
If only these grain companies were producer-owned co-ops that would pay dividends back to producers on the profits they are going to make. Wait a minute … some of them used to be, what happened?
Find out in my next column.