Falling crop prices may be a marketing challenge. Here are things to consider as you take your crop to the market this fall
Last year was a bonus year for most western Canadian crop producers. Because of the drought in the U.S., crop prices during the last crop year were much higher than they would have otherwise been. In 2012 western Canadian crop quality was generally good, and demand was strong relative to available supplies.
In contrast, this crop year is shaping up to be more of a marketing challenge. World production of wheat, rice, feed grains and oilseeds is forecast to exceed demand, leading to stocks building. Large Canadian production will test the capacity of the handling system, and our crop prices have dropped significantly into the harvest period. A bright spot is that, with the exception of lower average protein levels for wheat, Canadian crop quality is good.
Where to from here?
Here are a few things to consider this fall.
1. Your crop
First of all, assess the crops that you have on hand to sell. You may have taken representative samples as your crops were put into storage. Otherwise, obtain samples by probing your stored grain. Take these representative samples to your buyers to get their opinion on grade. You may wish to send representative samples to the Canadian Grain Commission for their assessment. With the information on grade, moisture, dockage and other characteristics relevant to marketing each crop, you can then gather market information relating to what you have to sell. Depending on the grade factors of your crops this year, you may consider improving a crop’s quality via cleaning or a separation, by drying, or by blending.
2. Cash flow needs
You may have forward contracted some of this year’s crop during the growing season to secure delivery opportunities and meet some cash flow obligations. Complete an updated assessment of your operation’s cash flow needs for the next several months. If you need cash flow, but decide to hold crops in storage for improved prices, consider using the Advance Payments Program to provide a tax-deferred source of cash flow of up to $400,000, the first $100,000 of which is interest free. In Western Canada, this program is administered by the Canadian Canola Growers Association.
3. Pricing and delivery alternatives
Review your contact list of crop buyers. Consider all your alternatives, including line companies, processors, feed mills, local feeders, accessibility of producer car loading, cash grain brokers and direct exporting. For each prospective buyer on your short list (which may differ from your neighbours’ lists), find out the pricing alternatives that they provide. These pricing alternatives may include spot sale, types of target pricing, deferred delivery contracts, post delivery deferred pricing and, for crops with a futures market connection, basis contracts, options on futures, business speculation and other combinations.
Do your best to determine security of receiving payment for each buyer. This security factor may include obtaining references and checking on payment insurance availability, whether that be through the Canadian Grain Commission or another source, as provided by some cash grain brokers.
4. Market prospects
Gather information to form your own opinion on price outlook and delivery prospects for each of your stored crops. Some of this information is free, provided through your buyers, radio, internet and print media. You may also choose to subscribe to one or more sources of fee-based market information or contract a marketing advisory service.
U.S. crop price prospects will again greatly influence our price outlook. Buffering the effect of large crops in Canada and the U.S. is the small beginning stocks for most crops. U.S. and Canadian feed grain production appears to be abundant. Small forward cash price premiums for feed barley are reflecting that situation. However, Canadian crop producers are in generally good financial shape, and have the ability to force price stability or improvement by withholding product via unorganized consensus. Higher protein wheat is commanding a demand premium in both delivery opportunity and price, and that may continue through this crop year.
Canola crusher expansions have led to a firm domestic demand base, and export demand for raw seed and canola products remain strong. U.S. soybean demand will again be front-loaded and oilseed prices will be subject to the weather and production prospects of South America, albeit at lower prices than last year. Canola also has the marketing advantage of a functioning futures market, providing for direct pricing as well as market signals. Those current signals reflect abundant supply, reflected in a strong carrying charge (that is, a premium for deferred canola futures) close to full commercial storage plus interest charges. This compares to the inverse or low carry futures market that we experienced last crop year. Canola basis levels (cash minus futures price) have weakened into harvest. Watch for basis strengthening as a signal of improvement in the supply/demand relationship for canola.
Pea prices have improved somewhat after harvest, and again this year are relatively strong for green peas. Dry bean, canary seed and rye crops have tight forecast carry-over at the end of this crop year, and therefore are subject to price improvement as the crop year progresses.
in the Longer term
We know from the U.S. drought-reduced crop of 2012 how price projections can quickly change in this era of strong and increasing crop demand. However, it is not too early to be looking forward to pricing for next crop year, considering the potential for a record South American crop to be produced in the spring, and the impact of a 2014 U.S. crop strongly favouring soybean over corn production.
Information is power and that is certainly true for crop marketing. The base for your marketing decisions is knowing your costs of production per unit so you can target and recognize profitable selling prices for your operation. You then need to know your product, and the choices that you have for pricing and delivery. Interpreting market outlook is an ongoing task. By combining information from your trusted sources with your experience in dealing with your buyers, you will be better able to make sound marketing decisions. †