Focus over frenzy.

By Joy Gregory

Yes, the economic outlook remains highly uncertain. But no, you aren’t helpless in the face of market volatility. Know your cash flow options, then take action.

Interest rates are on the rise. The fiscal fallout of a fluctuating Canadian dollar is good, bad or ugly depending on the headline of the day. And now a growing number of economists are talking about how all this might push up inflation even as the North American economy struggles back from one of the deepest recessions of the decade. What the heck is a farmer to do?

Take a deep breath, keep your eye on the prize and make sure your marketing program considers every available option, including Canadian Wheat Board (CWB) programs like the fixed-price contract for wheat, says ag marketing specialist Gary Pike, CEO, Pike Management Group. "We are going to experience a lot of economic volatility over the next two to three years and part of it comes from on-going issues in world markets unrelated to agriculture. That hasn’t gone away."

Market uncertainties aside, what farmers really need is a good dose of perspective: while the game board has changed, the basic rules remain the same, insists Pike.

"Take interest rates as an example. What we’ve seen to date are relatively minor increases. But because of how low interest rates have been over the past few years, even a mere one quarter of a per cent increase generates a lot of media coverage," notes Pike. He recalls how interest spikes of the early 1980s pushed past 17 per cent. "Right now, interest rates aren’t that big a deal for most producers."

What has changed is the relationship between producers and the banks that set those interest rates. Pike urges farmers to make their relationship with their banker a priority. "Make sure they know who you are and that you can show them you are on top of the business. They want to know how you plan to make money."

Nurturing those bank ties is especially important for younger producers carrying larger amounts of debt. "You cannot assume your banker will like your plan. You can assume that you will need to explain it. Be ready to prove how you plan to keep your costs in line and sell your crops."

Pike views the currency exchange rate as a kind of red herring: it can affect input prices and it’s another variable you can’t control but have to manage. He’s more concerned about how fluctuations in the price of oil affect Canadian farmers. As heavy users of petroleum products, farmers will feel the impact of $100/barrel oil much faster than many other business sectors where input cost increases are more easily passed to consumers, says Pike.

Control what you can
Farmers have no power over the complicated issues that shape the global economic situation. But they can step up efforts to protect and improve their cash-flow situation, adds Pike. Here are his top four picks for dealing with what lies ahead:

1. Watch markets and track basis carefully. Basis is the difference between the spot price of a deliverable commodity and the price of that commodity’s closest futures contract. Basis numbers will show a lot of volatility based on product quality and delivery location. Find out how basis relates to the cash price you can get. If it looks good, be prepared to make a deal.
2. Manage for cash flow and profitability. Do what you can to improve your balance sheet. Forward sell your crop before, during and after the crop year starts and ends. Lock in different percentages of your total crop based on profit. Stop waiting for the highest price. (By the time you know it, it’s gone!) On the input side, lock in prices when you can, and fine-tune your agronomics to reduce waste and optimize efficacies.
3. Keep up-to-date on the news. Find out what you can about what drives good-news markets for crops like canola and pulses. The U.S. is pushing for durum subsidies and overall wheat stocks are predicted to exceed demand until 2011. Use information like this to guide cropping plans.
4. Know your options. Know the dates for deferred canola contracts, track pulse markets, look at CWB programs like fixed-price and basis-price contracts, pre-harvest cash advances and the on-farm wheat storage programs. From a marketing angle, Pike’s no fan of crops where you have no control over the price you can get. But he knows milling wheat acreage is up across the prairies in 2010. "If you’re growing CWB grains, you cannot afford not to look at CWB programs. You have to know your options," he says. FF

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