Contracting ideas.

[wd9]

Looking for some new ideas on contracting, specifically with canola, that can be used to benefit the industry. And yes farmers are part of the industry.

Had breakfast with the Prism buyer, the Yum group of companies like KFC, Taco Bell, etc. Her concern in times of potential shortage of product was how can we guarantee product and delivery. Now price here is not the issue, they have money, so much as consistent delivery of product.

Are there contracting ideas that ensure good price for product, but yet encourage stable supply. I know the Japanese also have this as a high priority. So, thoughts?

[Hopperbin]

Like the specialty oil contracts they pay better basis for later months. All the months are contracted filled up before the crop is planted. They garantee to take a minimum amount of bushels from growers. This year as far as I know they are taking everything produced for the same basis.
No reason that would not work even for regular canola. Offer a better basis than everyone else and the canola will be supplied. Doesn't have to be done before planting but a better basis before planting would be an insentive to plant. Price can be locked in later but a basis contract should guarantee supply.

[FarmRanger]

How much do buyers want to spend?

Friday’s close at Winnipeg:
March futures = $573.2, July futures = $593.9, November = 575.1

The market will pay me a little over $20 to hold my canola from March to July. Store that canola from July to November and you pay someone $18 off of the July price to take your canola. Buyers should not be surprised when there are production problems and they can’t get enough canola because the market has given us farmers a very real financial incentive to reduce our inventories to Zero.

If a buyer wants to make sure that they have some canola for fall, make storage contracts for $20 over the July futures, and there will be farmers who will store it for you. The more a buyer pays over that figure, the more supply farmers will store for them.

[TOM4CWB]

WD9,

I would like to see some "Act of God" minimum price contracts.

On our farm... Canola is going to have to buy our acres. This is one way we would dedicate more back to canola... if options like this were available.

[just_wondering]

possibly a cash advance program. If someone invests in my business, and I get a guarantee price as well as specific delivery windows I would be very interested in doing business with them.
TERRA fuels in Regina has had good luck with their program I hear.

[just_wondering]

If I was a buyer and did "act of God" contracts I would have someone on staff or hire crop insurance to check bins(buyers cost). I have seen cases where if the contacted price goes against the farmer "their crop was a write off but Dads was twice the average"
I don't agrree with that, but it happens

[Hopperbin]

That is true JW, the act of God clause does not guarantee product. I was about to write that one before you said it. So if the buyer wants product perhaps the act of God clause is not so good. Terra's cash advance worked out good for them this year. They contracted lots of grain for a cheaper price than if they didn't have it(the cash advance). I could not believe them actually getting their million bushels over times 2 years out of our area with a 70 cent per bushel haul. 4 minus .7 equals 3.3 dollars per bushel net to farmer. Cash advance worked for them.

[TOM4CWB]

Hopperbin,

If a production contract is done... and crop/hail insurance used as back up info... an Act of God clause can easily and effectively provide what the grower needs... and what the contractor is looking for... supply at a reasonable price.

Why should we expect any thing less as growers...?

Grain co's get burnt big time on contracts during natural disasters the Act of God clause covers... 2002 is a good example. How many court cases were there for growers not filling contracts? NONE that I know of!


I simply offer to pay a fair share of the "Act of God" cost... by paying a premium for this reasonable risk management option!

[FarmRanger]

Wd9’s question was “Are there contracting ideas that ensure good price for product, but yet encourage stable supply”

While mitigating a farmers risk of low production, how would an act of god clause would provide a stable supply for buyers?

[TOM4CWB]

Farmranger,

I will simply grow more produce that provides a profitable price... with risk mitigation a part of the marketing program.

Many grain growers... especially those that have risk aversion tendencies or high relative debt loads, can not afford the time or capital required to trade futures. If a drought hits us... and Canola goes to $800/t, risk management needs to cover off these problems IF they occur.

I am willing to pay for this option... It has been offered before many times on Canola... HEAR with Bunge is a good example. We did this on NEXERA last year as well.

It can be done. It has been done. Why is it not being offered by everyone?

[FarmRanger]

Tom, I’m not arguing that production risk mitigation isn’t good for farmers who would be willing to pay for it. If you get a drought/hailstorm/herd of rampaging rabbits, that destroys your crop, you would be off the hook, which may be a good thing, but that won’t help fill a boatload of canola.

[Hopperbin]

Farm Ranger I believe the act of God clause cost is the cost to back up the futures position with a call option, so on regular canola would it not provide product security. I am not sure if I am right, someone can correct me if I am not.

[FarmRanger]

Hopperbin, if I’m not mistaken, the act of god clause that Tom was referring to was the ability of a farmer to be able to contract his crop, and in the event of a crop failure, not be on the hook for delivering product he doesn’t have. You are right that futures market options would indeed be one way of offsetting monetary penalties from non-performance of the contract. This would help the buyer who would use that money to buy higher priced product in the event of a shortage. What happens if too many of our bins were empty, as in the 2002 drought? There’s going to be somebody who doesn‘t get enough product at any price.

While insuring monetarily against production shortfalls, options may not be able to ensure physical supply, and if I’m understanding correctly, that’s what the original question was about.

Companies might be able to reduce production risk (contracting with irrigators for example), but what else will actually ensure supply like paying someone to actually keep canola that’s already in the bin until it’s needed? Keeping inventory wouldn’t be cheap, which is why my first post asked how much would a buyer be willing to pay to ensure supply.

[just_wondering]

the cash advance would have to be used to guarantee production essentially buy the crop before being planted use the crop as collateral and security.
I don't know what an appropriate # would be , it would likely depend on your area I could likely guarantee 8-10 bu acre other areas more/less
As for Terra fuels I agree on your math that's why I never contracted with them Had they gotten too >$5.00 last Jan. I might have.
This year might have to be $6-7 but we'll see.

[TOM4CWB]

Farmranger,

Bunge used a minimum price contract on HEAR specialty oil Canola. They were responsible to contract to meet needs... and a buffer in case of a problem. They got all they needed, and more.

Minimum price production contracts work to attract acres.

I buy a call against the production contract... and am set.