With freedom comes responsibility. That’s what western Canadian wheat growers are discovering as they enter a new marketing era and begin selling the globe’s second biggest grain crop from their home offices.
While some farmers have eagerly campaigned for such a day, others fear its coming. Regardless, on August 1, you’ll need to do more homework to successfully market wheat.
While Canada has long been known around the world for producing and exporting high-quality wheat, farmers marketing wheat on their own will find themselves facing lots of competition.
According to USDA figures, of the 694 million metric tons of wheat produced in the world in 2011, just under 144 million went to the export trade. Of that, the U.S. had nearly 19 per cent of the business sewed up. Canada’s share was under 12 per cent.
Canada also faces stiff competition from other wheat sellers including the European Union (EU), Argentina, Australia and some of the nations of the former Soviet Union. As well, world stocks of wheat have been rebuilding from the lows of the early 2000s.
But there is a bright side to this “brave new world” of wheat marketing. Canadian farmers now have more options and opportunities to sell their wheat on their terms — through major grain companies, domestic wheat processors, or a revamped Canadian Wheat Board. Also, they can protect prices by using futures markets and other hedging strategies.
Kevin Bender is one farmer who likes the fact there’s lots on the table for him to choose from when marketing the wheat he grows near Sylvan Lake, AB.
“I want to be able to ship right off the combine,” says Bender, who’s been shopping around for some specific delivery month contracts. “Before, there were no guarantees on delivery. It would depend on what the wheat board called for and when. Now it’s more like canola.
“I’m also hearing of a lot more demand for the mid- to low-quality wheats,” he says. “I guess they’re cheaper and more attractive to some companies. One company even offered me different proteins on CPS wheat, as low as 9 per cent, and we’ve never seen that before. Typically, that’s what we get more of here in central Alberta.
“It’s going to be more of a demand driven market, for what the customer wants,” adds Bender, who is also currently serving as president of the Western Canadian Wheat Growers Association. He believes he’s much more in the driver’s seat than in the past.
“We had only one buyer, and now there are multiple choices,” he says. “Some farmers may even want to deal directly with foreign buyers, for container shipments into niche markets. It will be a little bit more work, but before we got what they gave us. Now I can shop around with what I’ve got, and see what buyers are willing to give.”
When it comes to protein discounts, or premiums, he’s willing to put a little trust in those firms he chooses to do business with. “If a company takes advantage of a farmer, it’s not likely going to do business with that farmer in the future, so they’ll want to treat grain growers fairly.”
Transportation remains a key component of any buy-sell arrangements, but again, Bender sees choice. “There will be the option of selling at the bin, just like feed grains. We can have cash flow and bin storage management.”
Farming has always been full of risks and unknowns. The new world of wheat marketing just adds to that picture. But again, it’s a matter of perspective.
“There will be more responsibility, and more volatility,” acknowledges Kevin Bender. “But I like that. It means more opportunity. That’s right up my alley.”
Futures still in flux
RBC commodity futures advisor Keith Ferley points out that the new marketing environment moves wheat, as a farm commodity, closer to canola in terms of providing marketing flexibility for growers.
“It means farmers won’t have to be as reliant on canola for their cash flow,” says Ferley. But he admits the hedging picture for wheat is still a little fuzzy.
ICE Futures in Winnipeg has introduced both a milling and durum wheat futures contract, but so far liquidity has been slow in coming as, it seems, no one wants to be the first to jump in. The Minneapolis exchange offers a dark northern spring wheat contract, and there’s a hard red winter wheat one in Kansas plus a soft red winter wheat contact in Chicago.
“For the first time, Minneapolis is now allowing Canadian wheat to be delivered against their futures contracts,” says Ferley. “While some farmers are hedging in the U.S. markets, specific weather problems, such as a flood in North Dakota, could see Canadian growers get squeezed.
“It’s a discussion we have with all clients as we look for ways to get to their comfort level,” he says. “It is sparking some creative hedging strategies for wheat.” Wheat futures, though, remain a major price determiner.
Buyers feel their way
Farmers can now also deal directly with processors, but Ferley says they, too, are moving cautiously into the new wheat world.
“It’s a learning curve for processors,” he says. “Canola crushers have experience with contracts, but for the small wheat miller who’s only been a CWB customer, he has never had to do any hedging. It was only a ‘take it or leave it’ price, so they went hand to mouth. Just like Canadian farmers, they’re having to learn about hedging wheat.”
Grain companies began offering wheat contracts as soon as the legislation was passed in December. A wide variety of choices are available, but two of the key points appear to be protein and quality requirements.
“Wheat is so different from canola, with protein variance and disease issues such as fusarium and vomitoxin, so farmers need to be wary of discounts included in the contracts,” says Ferley. “You need to do your homework, because you’re at risk now, not the Canadian Wheat Board.”
Alberta Agriculture and Rural Development provided a number of winter education seminars for growers on marketing wheat. Market analyst David Wong also advises farmers to read and understand any contract before signing.
“It’s a live and learn process as we move forward,” he says. “Not everyone has all the answers yet. But pricing and delivery on wheat will become more separated, and farmers will need to be more proactive in lining up delivery.
“There will be more alternatives to consider, more contracts available and more niche markets to target,” says Wong. “Farmers will need to collect information from all sources to determine local farm gate prices at their bins.”
For growers not ready or willing to commit that kind of time and research, the Canadian Wheat Board is still in the game and offering the option to continue to sell into a pool. That will provide more grade target choices, as well as options on delivery points, grain handling companies, guaranteed payments and covering off some of the risk issues. The board is also offering a variety of cash contracts.