For many the first week of September 2014 was no doubt an agonizing experience as you had to sit by helplessly and watch it rain and snow and freeze. Undeniable proof that Mother Nature’s last name has to be Murphy, and she was in the mood to apply the full wrath of Murphy’s Law to the farmers of Western Canada.
In early September where I live, just north of Calgary, we had over 12 inches of heavy wet snow on the ground.
My worst fears of what could happen to the crops had been realized. It hurt to look at what used to be some very nice standing wheat and barley crops that were no more.
Now, thank goodness the worst of the snow storm seemed to be located along the foothills and No. 2 highway between Red Deer and Calgary. This still took in a lot of acres, but in the big picture it was a small part of the Prairies overall. The majority of the Prairie grain growing region was spared from the snow. Unfortunately the rain and frost experienced across a vast part of the Prairies did damage crops across the region. To what extent is hard to say until we see the quality of the harvest.
- More with Brian Wittal on Grainews: Changing times, yet again for grain prices
With futures prices under pressure we are sitting at four-year lows for grain prices so you may not be eager to sell right now, but the fact remains that you will have to sell sometime in the future to meet cash flow needs.
Here are a few strategies to think about.
1. Spread strategy
With the potential for the majority of the Prairie crop to be of lower quality this fall we are seeing grade spread widening out at the elevators. Buyers are not sure if or when and at what price they are going to sell the lower quality grains, so they are taking protection in the spreads.
Consider locking in a lower grade on the contract than the traditional No. 1 canola or No. 1 CWRS. If you have a pricing contract in place, the grade spread that will apply is based on the spread the day of settlement. To help reduce your risk of grade spreads widening further, contract a lower grade that you realistically think you are going to deliver. This way you’ve locked in the grade spread and you don’t have to worry if it widens out further before you deliver.
What happens if you deliver a grade other than what you have contracted? If the grade of the grain is different than your contract grade the elevator will adjust your spread accordingly and pay you for the grade you delivered. If you contracted a No. 3 CWRS and delivered a No. 2 CWRS they would adjust your contract price and pay you a premium — the current spread difference between a No. 3 and a No. 2. If you delivered Canada Feed, they would discount your contract price whatever the current spread difference is between a No. 3 and a Canada Feed.
2. Basis Strategy
Another strategy you can use is locking in a basis contract for forward delivery when the basis is attractive in anticipation that futures prices will rebound over the next three to nine months.
Here is where you can use the spread strategy mentioned above as well. When you do a basis contract for forward delivery and you are concerned that grade spreads are going to continue to widen out, lock in a basis for a lower quality grain.
A basis contract strategy also allows you the flexibility to roll the basis forward at a later date if you think you want more time to price the contract because you believe futures are going to go higher. Be aware that your basis value will be adjusted to reflect the carry costs in the futures markets and you may also be charged an administration fee by the grain company. Ask your grain company buyer if they charge an admin fee for doing a basis roll before you do a contract with them — not all companies do.
3. Tough discount strategy
Another thing to consider if you know you are going to have some tough grain and you are not going to be able to dry it would be to lock in the tough discount if you think they may widen that out as well. Again, the way to do that is to contract your grain as a “tough” so they apply the current discount. This will protect you from any future increase in cost.
Talk to your grain company dealer to see what their drying costs are or could be — they may be looking to adjust their fees, as gas is more expensive now than it was the past few years. This is not as big a concern as widening grade spreads but it is something to look into and consider.
Any way to reduce your costs or limit your losses keeps money in your pockets.