Stay cool in face of railway log-jam

An interesting thing happened in early 2014. The mainstream media began covering congestion in the grain transportation system. Agricultural issues, particularly such technical ones, seldom get this kind of exposure.
Unfortunately, when ag news makes headlines, it’s serious.

Not that farmers, particularly in the west, need any reminding. With bins overflowing, commodity prices falling, basis rising and loans coming due, producers are facing a very difficult, very stressful situation as they start thinking about how to pay for the crop they’re about to put in the ground.

Brian Wittal, owner of PRO COM Marketing, in Didsbury, AB, says there are solutions, but they require cleareyed, hard-headed decision making by producers. “Right now, I’m telling farmers to look at their personal situation very, very critically,” he says.“The question is how much cash do you need to put your crop in come spring, and what can you do to get it?”

You won’t get any argument on that from Charlie Pearson, provincial crops market analyst for Alberta Agriculture and Rural Development. “In the short term, there’s no magic wand,” says Pearson. “You have to know your situation — what’s in your bins, what’s in bags in the field, what your cash requirements are. From there, it’s a matter of really hustling to find those little gems — markets that are untapped; buyers who can take what and when.”

Both Wittal and Pearson understand that farmers are balancing the need to unload their old crop and, at the same time, forward sell their new crop. While that’s not an unusual situation for this time of year, the sheer amount of old crop still sitting around in bins, and the inability to move it, can seem overwhelming. Both offer suggestions about what to do, and not do, as spring approaches.

Change your strategy

To get some delivery into the system now, says Wittal, you’re going to have to accept that you’ll have to take a lower price and you likely won’t get paid in time to fund this year’s crop.“Delivery is at least four months out, if not longer, so this year, you cannot solve a cash flow issue with immediate delivery contracts.”

Pearson agrees and thinks most farmers will be selling old crop well into September and October. This isn’t to say there are no markets for old crop, but finding them will take longer and you’ll likely have to accept a lower price, longer delivery dates and higher transportation costs.

It means you can’t approach marketing old crop like you have in the past. You need to up your game and look for markets where you haven’t before, and you need to think about spending days, not hours, on the phone and computer trying to find any gaps that need filling — the “little gems” as Pearson calls them.

Don’t go wild with forward selling

Futures and options are definitely a good way to manage price risk, but Pearson calls for some restraint.“Do what you would normally do,” he says. “Have a price target in mind for how much new crop you want sold, look at your normal process and stick to that.

“If you normally like to have about 25 per cent of your crop priced into the fall, then do that,” he says.“Marketing will not be easy in the coming year, so be alert and be ready to be a decision maker when the opportunities occur.”

Be realistic about contract options

“This could be the year for using minimum price contracts,” says Pearson.“They guarantee you a minimum price, so you’ll get that base level and if the markets go haywire and prices go up, you can play into that, but if they go down, you’re protected.

“There are a few other tools farmers can use, including spring price endorsements and options strategies,” he says.But they all involve an expense to the farmer.”

Be realistic about pricing

Back in November, domestic crushers in Alberta were paying an average of about $10.50/bu. for No.1 canola. By the new year, that dropped to about $8.50/bu. and hovered there through to mid-February. Excess supply has put similar downward pressure on all commodity prices, so if you’re holding out for the heady days of $12 canola, you will be disappointed.“Ignoring the markets just because they aren’t good is a poor strategy,” says Wittal.

Abundant supply isn’t the only factor, either. The glut in the grain transportation system backs everything up, resulting in added costs that are mostly borne by farmers. Wittal points to the higher cost of grain cars, demurrage fees at ports, storage fees at elevators and the like. All these costs come off the farm bottom line in one way or another. It might not be fair, but it’s fact, and must be considered when you’re assessing pricing options.

At worst, you need to break even, so look at your cost of production and lock in prices on part of your crop to protect that, and then try to make some profit on the rest.

Tailor grain contracts

Pearson points out that grains, wheat in particular, offer more pricing variability through various grades and protein requirements. “Talk to grain companies about the grade you think you can grow comfortably,” he says, urging growers to think beyond the coveted No.1 CWRS at 13.5 per cent protein.

It’s about not over-committing what you know you can deliver. “If you have a history of consistently getting CWRS No.2 at 12 per cent, and you can contract for that — knowing you can deliver — it’s a good alternative,” he says.

Cash advances

The Canadian Canola Growers Association administers the Cash Advance program. It’s too late to get in on the 2013-14 post-harvest advance, but the 2014-15 program begins on April 1 and could be a last ditch option to cash flow seeding.

Economize where you can

It’s tried and true advice, but it works. Wittal is asking his customers to take a hard look at their numbers and reduce where possible. “If you don’t need new (machinery) or new bins, then don’t buy them,” he says.

Both Pearson and Wittal advise farmers to prepare themselves for a long, hard marketing slog in the months to come.

Even domestic markets are suffering from the transportation backlog.

As Wittal points out, domestic canola crushers still depend on rail to move their oil and meal, and it’s hard to take in more raw material when tanks are full of oil with nowhere to go.

“If we have anything like a normal crop this year, we’re still going to have this issue 12 months from now,” says Wittal. “This is an 18- to 24-month situation. I think it’s going to take that long to clear out our system. Even if there’s a disaster elsewhere in the world, we can put only so much grain through our system.”

“This is a very difficult issue to talk about,” says Pearson. “Every farmer’s situation is different. Some have moved some crop and are feeling fairly relaxed; others are down and discouraged. I think if there’s a watch word here, it’s fear. People need to try to manage that. Markets tend to straighten themselves out eventually. I look at world crop carryovers, and they’re still not all that big,” he adds. “And when I look at demand for grains and oilseeds, it is going up.” FF