Hedging the unhedgeable

Written by Denise Gabriel on Apr 11 2018

Category: Sell Grain

Considerations when contracting special crops

It’s the time of year when seeding decisions are top of mind for many western Canadian farmers. Wheat price swings and stressed canola rotations have pushed many farmers to consider non-futures-traded crops in their plans. These special crops include lentils, peas, durum, barley, chickpeas, flax, or others.

Marketing special crops can be complicated because there’s more pressure to time the market, and there are limited contracting options to help manage price risk as there are with futures-traded crops.
There are fewer end-use markets for special crops, and this means supply and demand signals often conflict, making pricing more volatile. The risk for farmers is selling too soon or too late.

Let’s put it into context: During the 2015/16 growing season, the price for red lentils varied by $19/bushel over just four weeks. Compare this to canola, where the biggest price swing in history was just $9/bu over 13 months in 2007/08.

Regardless of price volatility, with special crops there is no getting back into the market once a sale is made. With futures-traded commodities like wheat and canola, farmers have the opportunity to buy the commodity back.

So how do you hedge the unhedgeable? In my experience, the first step is to understand your profitability targets and to keep the practical needs of your farm in mind. It may sound simple, but here are three things most farmers wish they had known before selling their special crops prior to harvest:

1. A longer delivery window could mean a higher price.

Check your contract. Some contracts will offer a better price if you can live with a longer delivery window. But if you need to deliver within a certain timeframe for cash flow this may not be the best fit. If the contract says “August to December” it’s also best to assume it will be delivered towards the end of the window.

2. Know what influences market price.

There are no futures charts to help with technical analysis. We can only watch production fundamentals. Look at global production and avoid falling into the trap of using only local information to determine your bias on prices. Canadian lentil production was pretty much the same in 2015 and 2017, but prices have varied by $20/bu. Canadian production is obviously not the only market driver for this commodity.

3. Poor quality could result in a hefty penalty – or not.

We often forget that discounts for off-quality product can vary from buyer to buyer. With limited acres and resulting production, buyers often struggle to blend poor quality product – a service that wheat growers are accustomed to. For this reason, discounts at delivery can be steep. Quality discounts also vary between line companies and smaller buyers. For example, the discount for a spread from #2 to #3 lentils was $6.00-$7.20/bu during the 2016 growing season while the discount for a three-grade spread on durum was about a $5/bu discount. Always review the discount schedule associated with your contract prior to signing, and consider assessing your alternatives if you need to move off grade product. 

Special crops bring diversity to your farm, and remain an attractive option despite the marketing challenges they present. Where I work in southern Saskatchewan, these crops offer the opportunity to improve profitability. They also help to manage disease pressure. The key is to understand the role they play in your overall grain marketing plan.

Tags: Grain marketing, special crops, lentils, peas, durum

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