Dozens of companies across Western Canada offer a variety of contracts ranging from futures contracts that can help you price a still-planned commodity over the next year or two, to purchase contracts that basically say “show us the quality of what you have in the bin and we’ll figure out a price and delivery schedule.”
Contracts are just one more tool in the marketing toolbox, say marketing specialists. Don’t commit every acre of every crop you produce to a contract, but locking in a profitable price for a portion of your expected production makes sense. Some marketers recommend dividing your crop into thirds. Early in the year, lock in about a third of your crop to some type of forward pricing contract. In the fall, price another third of your crop. And then “play” with the final third of your crop on the spot market.
Here’s a sample of what some Prairie grain, oilseed and pulse buyers offer for contracts for some of the commodities.
Champion Oat Processors, based in Grande Prairie, Alta., buys oats in the Peace River Region primarily for the feed and pony oats market, says Mark Kurlovich, manager. The division of Champion Feeds (markets about 15,000 tonnes of oats per year, primarily to the U. S., and primarily to the race horse industry. The plump, white, oats are cleaned, clipped and polished the way pony oat buyers like. Champion also processes oats into oat groats, which are used in pet food and hog rations.
Champion Oats operate mostly on a purchase contract basis, says Kurlovich. “A farmer has 100 tonnes of oats. He brings in a sample, if the grade meets our marketing needs we determine the price and a delivery schedule that is convenient for both of us,” says Kurlovich, who has been in the grain buying business for 21 years. If for any reason the actual oats as they are delivered are not equal to the sample, then the load can be discounted or rejected. Contracts are net in 30 days.
As a price competitive company, Kurlovich says one of the main benefits for Peace River producers in dealing with his company is that they deal directly with the buyer/processor one-on-one and avoid any middlemen.
Grain Millers Inc., of Yorkton, Sask., (buys oats and other grains, sourcing oats from roughly a 100-mile radius in east-central Saskatchewan. They produce a range of conventional and organic oat products, including oat flakes, bran, flour, groats and fibre.
Grain buyer Terry Tyson says the most common contract used by oat producers is the flat price deferred delivery contract. Grain Millers hasn’t posted a price yet for the 2010-11 crop, but Tyson expects they will have a good bid for the coming crop year and “producers will be able to book full carries.”
“Full carry” refers to a futures market in which the price difference between contracts with two different delivery months equals the full cost of carrying the commodity from the delivery month of the first contract to the next. Carrying costs include interest, insurance and storage.
For example, if the price for December 2009 oat futures is $2.51 per bushel and the new crop December 2010 futures price is $2.98 per bushel, the full cost of carry between the two is 47 cents per bushel. The $2.98 price indicates a full carry, or in other words the contract represents the full cost associated with holding the commodity for that period.
Simpson Seeds at Moose Jaw,
Sask., (offers production contracts primarily for red and green lentils. Contracts are available in March each year for red lentils and all three sizes of green lentils. Typically, farmers in March lock in a price for 500 pounds per acre for delivery next August through December. The 500-pound contract represents about one third of their average expected yield, says grain buyer Mike Pierce.
The contract does have an Act of God clause if in the event of disease, hail or drought or some other event that causes a crop failure, the producer is excused from the contract.
Simpsons sources lentils mostly from central and southern Saskatchewan, although they have bought some quantities from Manitoba and Alberta in the past.
Pierce says some companies do offer guaranteed deliver contracts, which sets the price for a specific grade of lentil, but it means the producer is bound by the contract to deliver that quality come fall.” We don’t offer that contract, because depending on the year it can be hard for people to guarantee a grade,” he says.
Pierce says many Saskatchewan growers prefer to deal directly with their company rather than go through a broker. “They like it because they know who they are dealing with and where their product is going,” he says. “If your contract is for a No. 1 and it ends up being a No. 2, you can come here and we can deal with the situation, whereas if you are dealing with a broker you don’t know where your crop may end up.”
Roy Legumex Ltd., of St. Jean-Baptiste, Man., (deals with a wide range of pulse and specialty crops, says grain buyer Gord Sisson.
Production contracts and cash or spot contracts are the most common contracts Roy Legumex uses. Peas, lentils, dry beans, sunflower and flax can all be covered by contracts.
Most production contracts are signed between December and February with the company hoping to have all contracts in place by May. Most contracts cover 10 to 25 per cent of expected yield and are based on pounds or bushels per