“We’ve seen a clear indication that transactions with larger entities have been honoured far more consistently than many of those made with smaller processors.”
— RON FROST
In turbulent times, you want to take a hard look at any company you do business with. “The downturn is negatively impacting contracts,” says PMG marketing adviser Ron Frost. “We’re seeing more people abandon ethical business practices. The practice of not honouring contracts has filtered down to the farm level. The malting barley pool is a good example.”
A lot of producers have run into problems since the Canadian Wheat Board closed the malting barley pool. “At PMG we think that action is incredibly negative for an entity that is the employer of Canadian farmers,” says Frost. “The wheat board put huge pressure on malt barley producers when they shut the door. It’s already very hard for producers to see their way out of this straight jacket.”
A whole lot of politics are involved in this decision. Basically, the wheat board is trying to protect the higher priced barley they sold over the past several months. Frost says: “They want to protect the pool price so it reflects favourably on the other pricing mechanisms that farmers can use for pricing malting barley. One thing we know is that this is not in the best interests of farmers as a whole.”
There are too many fingers in the malting barley pie. A simple and economically effective transaction would allow a farmer to go directly to a maltster and contract a price with delivery in an agreed-upon time frame. But as it stands now, we have the wheat board involved with the maltsters, and then the farmer, and somewhere in there we end up with a selection.
Because of cancellations of export contracts and closing of the malting barley pool, we’re seeing companies back out of contracts at various stages with prices at $6.25 a bushel that were made last summer.
“Everybody is passing the buck,” says Frost. “Too often the wheat board says, “We need another sample of your barley to review it again for quality,” even though your sample was accepted last September and checked again in October or November.”
Then, to add insult to injury, on the second and third samples the wheat board says, “Sorry, you’re going to have to sell it off as feed barley.”
What’s this really about? It’s about the fact that the wheat board has adequate supply available at a lower price. “They’re backing out of contracts just like the wheat board backed out of their commitment to keeping the malting pool open for 12 months,” says Frost. “You can bet that “credit-ability” is becoming a big issue for the producer.”
Faced with the global credit crunch and weak export markets, farmers are finding that they can’t sell as much grain. “StatsCan says the total wheat export pace is down from last year despite increased supplies by 25 per cent from a year ago, and the barley export pace is down more than 60 per cent on increased supplies,” says Frost.
We’re likely headed towards a carryover of wheat that may end up double compared to what we had 12 months ago. We’re seeing a lot of lentil producers in trouble with contracts made at 40 and 45 cents a pound. Current prices are in the mid 20s.
HONOURING LENTIL CONTRACTS
Last fall, pulse growers started hearing, “Sorry we can’t honour your contract.” Why? Because the contractor says the buyer at the other end couldn’t get a Letter of Credit.
Then all too often a contractor will say: “I have to back out of this contract, too, but I’ll buy your lentils for 24 cents if you want and I’ll give you cash today.” So the farmer is forced to give up his contract at 42 cents.
“In the past six months, experience has shown us that delivering your peas and lentils to larger, more reputable line companies is preferable,” Frost says. “Not all of them handle large volumes, but we’ve seen a clear indication that transactions with larger entities have been honoured far more consistently than many of those made with smaller processors.”
In financial meltdown conditions, the big companies are more inclined to stand behind their contracts and swallow them if necessary. Their reputation is on the line, and that’s helped ease the situation, at least for some pulse growers.
Given the economic chaos, I think we can thank our lucky stars that food and grain are a necessity. Even though we’re experiencing a period of initial contraction, the contraction will not be as deep as it will be with most other products. Agriculture is well positioned for a less protracted recession. We will be among the leaders on the way out. In the meantime, make the most of what you’ve got and start with smart market transactions, the wheat board notwithstanding.
Gary Pike is president of PMG. PMG provides management, marketing, business planning advice and coaching to members who represent 2.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.agcoach.caor call us toll free at 1-877-410-7595.