It’s January — the air is crisp and the snow is fresh. It’s also the time of year when only two things are on the mind of lentil growers: “When do we leave for Mexico?” and “What will new-crop lentil contracts be, and should I sign one?”
It wasn’t that long ago that lentil acreage was a fraction of what is today. Many farmers didn’t know that much about lentils, how to grow them, where or when to market them. The fledgling industry and its buyers and processors needed to encourage and secure a supply back then, and so used to offer new crop prices every year in January, typically at the Crop Production Show in Saskatoon. The first lentil contracts were all about making sure enough of the crop went into the ground so that processors could ensure a supply.
MODERN CROP CONTRACTS
Fast forward to 2011. In the 2010 planting season over three million acres of lentils were seeded. Do processors and marketers need to encourage producers to seed lentils? Not at all. So the question now is why do processors and marketers offer new crop contracts at all?
The answer to that question certainly is complex. Each company has there own reasons for the level of contracting they do, however all companies are aiming to do two things: secure a minimum volume and keep their processing facilities working at efficient levels.
First, most new crop contracts come with a clause that assigns the processor the first option to buy the balance of the farmer’s production. This means that by buying a small portion of your production, the marketing company has, if they chose to exercise that option, gained access to much more production. Processors want to own your lentils; it means throughput for them and that is how they make their money.
Second, processors and marketers want to make the most of the first part of the season, the new-crop season in of late August and into September and October. If they have purchased your new-crop lentils this allows them to make sales. They’re also more likely to maximize their capacity this way, adding to profitability.
WHEN TO ENTER INTO A CONTRACT
Knowing the reason buyers want to buy your lentils in January should help you decide if you want to sell or not. To be sure, a buyer will only be buying in January (or at any time of the year, for that matter) if they believe they will make a profit on your lentils. Fair enough, as we’re all in business to make money. Or at least you should be.
Just as buyers try to ensure their company’s profitability by owning new crop, growers will consider the same for their operation when selling. Many farmers consider two core ideas when deciding whether to sell new crop or not — cash flow timing and upside potential in the market.
Price reigns supreme of course, so the first deciding factor is absolute profit in the face of storage space and the all-important timing of cash flow needs through the fall. Aiming for contracting 20 to 30 per cent of production is a reasonable way to secure some guaranteed movement and cash when you need it most.
The second key consideration is the potential up or down side to the current new-crop offer. In the past, when marketers were eager to encourage lentils, their was typically limited upside potential. In today’s more volatile market there are many factors to consider: production in other regions, our own Canadian acreage fluctuations and currency movements are just a few. Farmers need to assess the realistic chance of what any up or down side is and how far that price movement will be from today’s offer.
2011 NEW-CROP PRICES
So what will this season bring for prices on new-crop lentils? Spring is a long way off yet, making predictions difficult, however we do have history and averages to use as guidelines.
My assumption today is we will see a reduction in lentil acres perhaps this year, perhaps 15 per cent or so. This will not likely have a significant impact on prices as we will have some carryover of stocks, albeit of very low quality.
Current grower bids for No. 2 lairds are in the 34-cent range and No. 1s at 38 cents (as of early January). I expect newcrop prices to reflect similar to slightly lower values. After all, why should you sell newcrop lairds for less than current prices when we all know we will likely be sold out of good quality Lairds shortly?
Current grower bids for red lentils are in the 23 to 24 cent range. I expect new-crop bids to reflect similar values to this or perhaps closer to 20 cents. Reds have more variables than greens, and depending on what news comes from the other growing regions over the next few months the price may vary.
All in all lentil prices still look positive for 2011. Most likely the new-crop bids will be in a profitable range for farmers on all lentils. As always, I encourage you to ask everyone for as much detailed information as possible to make the most informed decisions. Happy marketing!