After seeing how the past winter evolved in regards to extremely high basis levels and limited delivery access because of the bumper crop, I have been looking at available options to help farmers better manage these risks.
Today I want to take a look at producer cars and how they can help manage basis fluctuations and establish delivery opportunities. We will review the risks and rewards to help you better understand how and if producer cars can fit into your marketing plan.
Before we get too deep into the details of using producer cars the first step is to see if there is a producer car loading site on a rail siding near you. The best tool I’ve found for that is on the CWB website, which shows producer car loading sites across Western Canada. For a complete updated listing you are best to go to CN and CP’s websites and query producer car sites, as they decommissioned a number of loading sites earlier this year.
If one of the loading sites is within reasonable distance to your farm, you need to find out if the site is a public site where you can load on your own cars or if it is a privately owned short line railroad. If the site is on a private rail line there is likely a loading facility or two that you may be able to access, but it will be for a fee — that’s their business, and they need to make money moving grain.
To ship a producer car your grain must be contracted and sold through a company that has access to a port facility or end user so that the car can be unloaded when it arrives. The CWB is one such company. Most other major grain companies do not offer the option of producer car loading as they would prefer you deliver to their facilities, enabling them to capture handling fees.
- From the Manitoba Co-operator: KAP wants open railway running rights to spur improved rail service
Some short line railroad companies and producer car loading facilities that are privately or co-operatively owned act as agents for different grain companies and can help you understand who you need to deal with and sell your grain to in order to be able to ship producer cars from their locations. Some companies also sell and ship grain directly to U.S. mills.
You need to know the buyer and their grade expectations before selling your grain or committing to loading a producer car. The risks and discounts associated with shipping out of spec grain can be steep. Your ability to challenge a grade unload is limited when shipping into the U.S.
There is an application that you must fill out for requesting a producer car(s) and there are fees attached to that. You can either self-administer the car or have the grain company you are dealing with do the administration for you (they will charge a fee for this service). If you self-administer you are responsible to ensure all paper work is completed and sent to the appropriate agencies, all fees are paid and that the cars are released promptly to the railway when the car is loaded. You will want to track the car and make sure the unload information gets back to the company you contracted with, so they can make final settlement for you, or you can have your handling company act as your agent and do all that for you.
You can use producer cars to help manage the risk of wide fluctuations in basis levels like we have seen the past four months.
If you contract your grain through one of the CWB pool accounts and ship it by producer car, you’re letting CWB manage the basis for you. The basis you will receive will be a pooled average basis from all sales included in that pool.
If you use the futures or basis first contract that CWB offers, the basis you can lock in would be a pooled average of actual sales values made by CWB.
By using one of these pricing choices you know that the basis you are going to get reflects actual sales values (plus an administration fee).
If you contract grain with CWB a Force Majeure clause in the contract offers you protection if you should experience a production loss during the growing season.
There are a number of risks involved with producer cars:
- You get a very small time window to load the cars before you can be charged a demurrage fee.
- If you file your papers late you will be charged a fee.
- If you overload a car the penalties are very steep.
- If your grain is down-graded your only choice is to appeal to the Canadian Grain Commission. You cannot take the grain back to blend it.
Producer cars provide flexibility and options but there are risks attached. You are the only one who can decide if they will benefit your farming operation.
For more details on producer cars go to the CGC website.