The Buck Stops Here

It is old news to most farmers that the past 18 months has been a period of unprecedented grain market volatility. This has introduced tremendous uncertainty and new challenges for all players in the grain supply chain — from primary producers to grain companies and the CWB, right up to the end user.

On the bright side, we have seen some phenomenal prices. This crop year, there will be a record amount of bulk malting barley exports from Western Canada — mostly at record prices for farmers. The CWB Pool Return Outlook for two-row designated barley is $6.97 per bushel, which nets out to about $5.50 per bushel at the Saskatchewan farm gate. This is the highest pool return ever, up seven per cent over last year.

On the flip side, international malting barley prices collapsed in a remarkably short period of time. Values for European malting barley (your main global competition this year) dropped by US$220 a tonne, or more than 50 per cent, between June 2008 and January 2009.

Faced with such a badly deteriorating price structure, the CWB decided in January to take steps to protect farmers’ pooled returns. With minor exceptions, any new sales of Western Canadian malting barley after January 24 have been made through upfront cash contracts as part of the CWB’s CashPlus program. Farmers who had pooled contracts accepted prior to that date continue to have their barley included in the pool.

The CWB estimates that over 80 per cent of our total malting barley sales program for this crop year will be pooled, with the remainder done through CashPlus contracts, both before and after January 24. All selected and accepted contracts have been fully honoured.

The CWB’s goals are to maximize sales of malting barley at a decent premium to feed barley, give farmers more pricing options and provide clearer price signals. The decision to pursue new sales after January 24 by sourcing through CashPlus helped us achieve these goals. With the pool value much higher than the current feed market, many farmers with selectable barley may have been tempted to hold out for selection and miss reasonable feed sales opportunities.

In reality, given the large high-quality barley crop and fixed global demand, further sales and selection of Prairie malting barley would be limited. At that point, malting barley sales were already well above the 10-year average. We are now projecting a pool above 2.2 million tonnes, sold for record returns.

The CWB has no incentive to source grain at low prices. As farmers’ marketing agent, our sole mission is to maximize producer returns. When we do business through the pools, we do not “buy” grain at one rate and sell it at another. We simply sell it for the most we can get and pass all the revenue, less costs, back to farmers.

The rest of the grain industry operates on margins, where profit is determined by the spread between purchase price and sales price, less costs. In the spring of 2008, a number of selecting companies signed production contracts with farmers at a minimum price, which was much higher than current market values. Many farmers have recently found that their barley is being rejected on quality grounds that have often been disputed. However, the vast majority of selectors are honouring their contracts.

The CWB is not a party to these contracts. We are not involved in quality selection and it is not the CWB who rejects farmers’ barley. However, we can help apply pressure for independent quality analysis and contract enforcement when we are a party to a selected and accepted contract. When we are not — as with two-party production contracts — there is little we can do.

HOW TO PROTECT YOURSELF

There are steps that you can take to protect yourself when entering into malting barley production contracts:

Get the amount of charges and discounts in writing;

Ensure that all quality specifications are clearly defined in the contract;

Assess the risk of meeting specifications (for example, meeting 11-or 12-per-cent protein or zero-per-cent chitted may be difficult in some areas);

Keep samples — both an original sample and another from time of delivery. If a dispute arises, these can be sent to an independent third party for analysis.

You should also make sure you know who you’re dealing with. For example, there are significant differences between a two-party production contract and a three-party CashPlus contract. Charges, discounts, premiums and other terms can vary significantly between companies. The Canadian Grain Commission publishes the tariffs charged by primary elevators and selectors for elevation, storage, cleaning and drying. They can be found online at www.grainscanada.ca.

Bob Cuthbert is the senior marketing manager for barley at the Canadian Wheat Board.

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