DODGING DOWNGRADES
BY TREVOR BACQUE • LEAD PHOTO BY ROB MCMORRIS
Every farmer will experience it at some point. Making a grain delivery at their local elevator, a sinister sample downgrades the entire load of a crop so dutifully grown.
The hit on a farmer’s pocketbook may lead to greater issues with elevator managers, grain companies and ultimately, the system itself. Often, disputes circle back to what’s written in a grain contract and what’s in the truck on delivery day. What does the fine print truly say and what recompense does a farmer have, if any?
Todd Hames farms north of Marwayne, growing spring wheat, canola, peas and the occasional field of silage corn or barley. Off a busier-than-ever Highway 16, Hames’s hauling options are above average. Within two hours he can choose to sell his grain to any of five companies. To his good fortune, he has rarely faced a serious discrepancy at the elevator, but that’s not to say it’s always been rosy.
Last year, after growing a stellar crop of yellow peas, he trucked his pulses to a nearby elevator. His on-farm test showed this entire pulse harvest ranged between 15.5 and 16 per cent moisture. One can imagine the look on Hames’s face when sample probes displayed a very different reading of 16 to 17 per cent. He quickly found himself flirting with the line.
“What I found difficult was when I shopped that sample around, I was getting a lot of testers agreeing with mine or close to dry, and [the grain company was] still testing 16.8 or something like that … at least 16.5,” he said.
At such an impasse, farmers have very limited recourse. Hames’s three additional independent tests all returned readouts no higher than 16.0, so he played his hammer and requested a “subject to inspector’s grade and dockage determination,” commonly called a Subject To, from the Canadian Grain Commission (CGC). After both parties agreed to a statement of facts, off went the sample to Winnipeg for analysis.
Results arrived back at the elevator a few days later. The Grain Commission sided more so with Hames, arbitrating the sample at 16.3 per cent—still above what he tested, but certainly lower than the elevator’s declaration. Afterwards, he and the elevator staff came to an amicable agreement when the manager agreed to average his entire 500-tonne delivery as dry.
“When our hired man brought the next bunch of peas in, the company didn’t back down,” said Hames of a subsequent contract. “I found that disappointing they weren’t willing to agree that their tester was a little bit off. It wasn’t like my peas were testing 17, 18 per cent.”
If the situation sounds familiar, that’s because it is. Delivery disputes are common, and beauty is often in the eye of the beholder, or perhaps prober, when it comes to a grain sample. Hames implores fellow farmers to determine their grain’s quality with pinpoint accuracy before hitting the highway.
“I can’t stress enough that good harvest samples are your best weapon or way to mitigate or help yourself from having trouble,” he said. “Once you’ve unloaded, you’re in a tough negotiating point. If you have a discrepancy on grade or you don’t feel they graded it properly … you don’t want to unload a bunch of grain. You don’t have as much of a position especially when the company dumps it into their 3 red spring bin and you wanted 2. They can’t bring it back.”
Other obvious factors to be looked at when in contract talks include dockage, drying charges, shrink and the ever-changing discounts. Most contracts have off-spec adjustments on grade and protein. Companies review old and new crops, not knowing what adjustments may be made ahead of time and are equally unaware of what market reaction will be.
There are multiple types of contracts with fixed price and fixed basis, both deferred-style contracts, being the two most popular. Spot contracts exist and certain elevators allow fixed basis to be permitted within them, allowing farmers to defer setting the value of the contract beyond the delivery date.
Discount and premium schedules apply where proteins are lower or higher than expected. Contracts almost always come with a quality expectation, as well. As market conditions change, so do the schedules, which would already be agreed to in a contract.
“They won’t lock it in ahead of time and this is the really frustrating part, but sometimes it works in our favour,” said Hames on discounts. “Sometimes the schedule gets better, sometimes it gets worse, but the point is you do not know what that is going to be until you deliver.”
The schedule for barley is virtually static since the crop is so straightforward. It’s with wheat that niceties become more complex than canola. Wheat spreads usually come with different discounts every tenth of a protein point. A 13.5 per cent protein level will price out differently than a 13.6 and typically the spreads cover every number from 11 to 15. The schedules are living documents and never the same year-over-year, either, since every crop year is likewise never the same.
Due to market vagaries, Hames has witnessed a rise in the number of farm business consultants helping people to effectively market their grain. “It does help with the second voice to give you the reality, less emotion and more, ‘this is what the market is telling us,’” he said.
For Geoff Backman, spreading risk and asking the right questions are keys to successful crop marketing. “You can ask ‘what’s your price for wheat?’ or ‘what’s your price for No. 2 with 14 protein?’” said Backman, the Alberta Wheat Commission’s business development and markets manager.
“If you ask for the latter, you’ll get comparable results across the board and pricing.”
Photo: Courtesy of the Canadian Grain Commission
For discount schedules, Backman noted elevators are free to set the discount schedules based on market conditions. If a farmer contracts grain outside what they expect to receive, there’s going to be risk built into the change in discount between the time they sell and deliver.
Not surprisingly, the schedule is tied to basis, markets and a grain company’s needs. Adjustments are routinely made until a grain company finds itself competitive again with sellers. Backman urged anyone signing a grain contract to make multiple phone calls to lock in the best price. “Worst-case scenario, you’re going to take the contract you’re offered,” he said. “Your best-case scenario is you take a contract that fits your farm.”
For farmers longing to play in an open and transparent process when delivering grain, there’s good news. The marketplace has never seen such a horde of buyers jostling for position. Just ask Wade Sobkowich, executive director of the Western Grain Elevator Association.
“It’s a very competitive environment and margins are extremely thin for grain companies,” he said. “They are trying to attract that farmer’s grains through creative means.” He points to newly constructed elevators and port terminals in Western Canada as a positive omen for farmers who now have a distinct advantage in today’s “overbuilt” system.
The prices set at the elevator are indicative of what’s occurring on a global trading floor and not in a backroom with surreptitious motives, according to Sobkowich. “Grain companies don’t dictate the prices they pay to farmers,” he said. “It seems that many farmers are persuaded that grain companies do dictate those prices. Any company that doesn’t pay a competitive price doesn’t get the grain.”
Similar to Backman, Sobkowich’s advice to farmers is to completely understand what an elevator’s discount schedule is and the quality of the grain they themselves plan to deliver. Beyond that, a farmer must understand the terms of sale as agreed to in the contract well ahead of time.
However, issues may still arise. Enter the CGC. Arguments are settled with its holy book, the Official Grain Grading Guide. The Guide, updated every August, sets parameters around all 20 of its recognized crops and serves as the framework to mediate legitimate disputes between farmers and elevators.
Only tiffs connected to grade, dockage, protein and moisture are examined, according to Daryl Beswitherick, the CGC’s program manager of national inspection standards. Of the quarrelsome categories, majority grievances centre on grade and protein.
On average the CGC receives approximately 200 annual Subject To requests, a micro-fraction compared to the number of grain deliveries made across the country during the same time span. Why then, if a Subject To is the immutable mediator, are there so few requests for it?
“There is a segment where producers are leery of involving the CGC,” said Beswitherick. “[They] don’t want to. There’s an impression that they’ll upset their elevator manager and they won’t be able to work together after that, but I’m not sure why that is out there.”
Beswitherick said it’s solely the responsibility of the farmer to know their grain inside-out so as to shield themselves against a nasty surprise at the elevator. The CGC pitches in and does its part to educate, as well. Staff attend many tradeshows throughout the year and make it a point to teach farmers about their rights and obligations for grain deliveries. It also recently created a PR campaign called Know Your Rights to re-enforce such talking points.
“Car dealers don’t come to consumers and say, ‘hey what is my car worth?’ Producers should know what their grain’s worth,” said Beswitherick.
Another point of financial reference for farmers, the CGC always posts the maximum elevating, cleaning, drying and storing fees online to ensure transparency and avoid price gouging. However, it doesn’t touch the discount schedule since such information is not in its mandate through the Canada Grain Act, according to Beswitherick.
If a farmer has issues aside from grading arguments, the CGC also has a dispute resolution wing within its ranks. Those situations, such as a disagreement between a farmer and a grain company concerning discounts in their contract, may be investigated on a case-by-case basis.
He believes paying a small price today could mean more money tomorrow. “If you have a full bin and [a Subject To] costs $50, what’s that bin worth?” he said. “You’re marketing millions of dollars of a commodity. Know what you have.”
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