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By JON DRIEDGER
Bouncingback
Last fall’s harvest was brutal
for the majority of Prairie farmers. Many
growers have crop still unharvested and
fieldwork left undone, yet are facing satu-
rated, frozen ground in their fields. Hope-
fully, the spring will be early and dry,
which might allow for some catching up
and timely seeding. But, of course, that’s
not a guarantee, and a late and wet spring
would only make the situation worse.
In a normal year (if there is such a
thing), farms would be planning sales for
fall 2017, as they anticipate the need to
move grain during harvest. Most opera-
tions have to move at least some crop in
the fall, and it’s usually advisable to book
these sales in advance rather than putting
yourself at the mercy of the spot market
at a time when prices tend to come under
seasonal pressure. Given the circumstanc-
es, many growers are understandably
cautious about making any forward sales.
How can growers manage this addition-
al layer of uncertainty for the 2017 season?
There is no magic bullet that will solve
the problem, but there are some things to
consider in making the right decision for
your farm.
Whenever producers make new
crop-selling decisions, they are essential-
ly trading one risk for another. Specifical-
ly, the price risk is removed when value
is locked in. That being said, production
risk is taken on in the event that the crop
is unable to be delivered. By not making
a sale, producers carry price risk, but
don’t have to worry about a production
shortfall.
It’s not always easy to navigate this
trade-off. When prices are very attractive,
the risk of a decline is higher than when
values are lower, which in turn may make
it worth taking on some production risk
on a portion of the crop. Finally, every
farm has varying comfort levels as to
how much crop, if any, they are willing to
forward sell.
In some ways, we can view the current
circumstances as having moved the risk
trade-off down the scale to where the risk
of not being able to deliver on a forward
sale is higher. This may raise the bar to
where we are prepared to make a commit-
ment (i.e., where a higher price is needed
to make it worthwhile to lock in values
and take on the potential risk of coming
up short on production).
Does this mean that growers should
abandon the idea of locking in prices for
fall delivery until the crop is safely in the
ground? Definitely not, although our ap-
proach and the tools that we use may need
to be tweaked.
First and most important, regardless of
the circumstances, growers need a sound
understanding of the fundamentals for
each crop as well as the factors that will
drive prices going forward. After all,
how can one determine what is a “good”
value and fairly assess the risk/reward
trade-offs between price and production
risk if we don’t understand the underly-
ing market dynamics? This is even more
important when the production risk is
magnified.
Second, think about pricing contracts
that incorporate some protection for
production risk. Some contracts in-
clude an “act of God” clause. This might
require accepting a lower price than you
would if you were making a sale without
the clause, but perhaps that trade-off is
worth it.
In the case of a crop like wheat, selling
a lower base grade may reduce some of the
quality risk. Many contracts will pay you
the premium if you grow a higher-quality
grade. If not, then perhaps you can buy
some lower-quality wheat to fill that con-
tract, while marketing your better sample
into a higher-value outlet.
Third, consider the use of put options
on futures contracts. These tools allow
growers to protect downside price risk
without creating any obligations for their
production, while still leaving the entire
price upside open. These contracts are
also very flexible.
The cloud of the 2016 harvest contin-
ues to hang over many growers as we
begin planting this spring. Even though
it might make certain marketing deci-
sions more difficult, we can’t afford to sit
on our hands and hope the price side of
the equation works for the best. Instead,
take advantage of the tools and strategies
that are available when opportunities do
arise, and then recalibrate as needed. Last
but not least, pray for favourable spring
weather.
Jon Driedger is a senior market analyst
with FarmLink Marketing Solutions.
Brutal 2016harvest conditions canaffect 2017 cropmarketingplans
Spring
2017
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