Today's Farmer

[Steve]

Farming is a business and is changing with time, but some farmers are slower to change than others. The reasoning behind that is as the old saying goes, “ don’t fix it if it isn’t broken.” This system of farming works well for debt free farmers who have a good land base, which was inherited or bought years ago.
I read earlier on one of the threads a big discussion if farming was a business, it is irrelevant what you call your business, but Revenue Canada will put you in the right category when you file your income tax.
Coffee shop talk has not changed, it has been a gloom and doom farming in the last 50 to 60 as I remember, “ This is the worst year and if we don’t get help now, we will lose our farms”.
It is amazing, that next spring all the farmers are out seeding their crops, with maybe minimal Government subsidy or just an interest free advance on their stored grain.
The farmers have been crying wolf so often that the general public and Government people takes this as a joke even though the farmers do need the help.
The only way one can appreciate farming is firstly being an employee and employer in a business not related to farming and you will realize that no business is a bed of roses.
Coffee shop talk farmers are saying it takes a lot of money to start farming therefore the young people have no chance, because the Government is reluctant to help. It takes a lot of money to start any lucrative business and stay there, which means that some people will be employers and others employees.
You also hear farmers saying the big corporations will take over and the small farmers can’t survive. Lets beat them to the punch and start operating like they do, total your input cost and add in a reasonable profit and sell at that price. I know some will say it is imposable, but on the other hand how can one say you are selling the grain below production cost and still be in business.
I went to a grain and oil marketing seminar a few years ago and the instructor started by trying to impress us with his farm management, market analyst, future market, puts and calls. This seemed to come across to the average farmer as I am smart and you are a bunch of dummies. Most grain and cattle producers are managers, market analysts and salesmen and we call ourselves FARMERS. He was more or less saying if you dummies would learn how to play the futures market there is easy money to be made and you really don’t have to grow any grain. I have yet to witness one of these so call experts practice what they preach.
I use to price my canola on the future month that seem to be a good price and delivered on the same.
I would appreciate if someone would explain in detail to us dummies how to market on the futures WCE and the possible profit or loss, because the way I see it now my chances are the same at the casino.

Regards Steve

[cowman]

Steve, I can't answer your questions about futures but you are right on about all the other stuff! If life is so tough out here on the farm then we should just quit and get into something else. Nobody is holding a gun to our head and hey, opportunity is knocking! Why live like a second class citizen when you can get out and do something else that makes the bucks? Treat farming like the hobby it is becoming!

[charliep]

Steve

I hear your comment on marketing/use of futures. I higlight the futures/ options side (perhaps sometimes too much) to keep things interesting in the area/get some discussion going. They are only tools that can help a farm manager deal with risk in some cases (forward contracting/hedging) and capture potential price increases after they have sold their crop (with the understanding that they lose money if prices go down).

The real objective in farming however is being profitable with marketing being one component. Watching costs and achieving good productivity are equally as important.

A farm manager I respect a lot approaches this topic from the side of the profitable gross revenue/acre. His target on all his crops is $200/acre (more is better but he considers this a bare minimum). If he sees risk on the pricing side, he will take steps to lock in a price for a portion of his crop (with a view of cash flow needs and yield risk in mind). He doesn't worry as much about the market as being consistently profitable - a tough go in the current environment but something he has been able to achieve over the past 25 years he has been in the business.

I don't know if you have been on board before but welcome. I am looking to some good discussion over the winter.

[TOM4CWB]

Steve,

Good comments on farming today, but...

Like Charlie, I look at futures as a means to an end, not the end itself!!!

Remaining competitive reqires that I risk manage, and provide the right product that meets my consumers needs, that I can produce profitably.

Farming and small business are both in exactly the same boat, if we don't do either, we are gone into the sunset!!!

Now, when I deal with grain marketers, I need these partners in my farm to have these same objectives or we will both be in trouble...

The Futures are just a meeting place for buyers and sellers to meet and exchange their grain, at some point in time. I appreciate those who will actually step up and buy my product sometime in the future, they can help me be profitable, if I have control of my costs.

Now with the CWB and futures, by not allowing my farm access to the futures prices on a daily basis, to cash price if that is my farm's need, is a crime.

The end of the perpricing system on July 31 is totally unacceptable, as I do not know my quality of wheat then, how can I possibly know the volume???

If I do not know my volume because of production risk, and the CWB charges me a fee to get out of a basis contract, then do I really have reasonable access to a cash price?

By the way in the Canola marketing I have done over the last 25 years, no one has ever charged me to put aside a basis contract, and It is against the law for me to deliver someone elses wheat on my permit book to fill a contract unlike the Canola marketing system to fill a contract!!!

The CWB really needs to get serious about its pricing options, and meet the needs of grain farmers rather than just doing what is easy and fits nicely into the CWB price pooling box.

A little competition on the CWB basis would really bring wheat production back up, but I guess we are a ways from that, aren't we????

[melvill]

Tom4cwb, no one has ever charged you for not delivering on a canola basis contract? Either you've never had a basis contract (which I really doubt) or you've never defaulted on a basis contract (which IS possible) or you've defaulted and have been extremely lucky. My experience based on a small number of client non-deliveries on canola basis contracts is that there has been a penalty if the spot basis was stronger ( or narrower if you like) when the delivery was defaulted on than the basis in the contract.

If I remember correctly, CWB basis contracts can be reassigned to another CWB permit book holder to deliver the product.

[TOM4CWB]

Lee,

I have always delivered basis contracts that have been priced out, but unpriced basis, have been reduced to the amount I have to deliver.

Part of the reason is that if a person is careful, and the basis teriminates in the fall, during harvest, without exception the basis has always been higher than when I contracted.

It is simple then to just have the contract canceled, or have another farmer fill the basis I do not have grain to fill.

If a grain company is being courtious, and I treat them fairly, being up front when a hail storm hits, or drought, why would this be out of the ordinary?

This is why I say the elevator companies I do business with are my partners, I want them to be in business next year, and they have been decent and seem to still want to do business with my farm on a long term base as well.

Is there anything wrong with this type of relationship Lee???

[melvill]

tom4cwb,

I agree with everything you said in paragraphs 2 & 3 above, however, how much success have you had getting a neighbor to fill a basis contract that you couldn't? My experience is that in that circumstance, "neighbors" are hard to come by. They shouldn't be because, you're right, fall basis is often much weaker (wider) than summer basis contracts. IT seems to me that there just isn't enough understanding out there among a big chunk of the farming public.

Of course, this debate is mute if the grain co will let you cancel or default of a basis contract as long as they can source the undelivered grain at a weaker (wider) basis that your contract.

Again there are problems of understanding. I talked to a producer last week who "cancelled" a basis contract and was thrilled to get out of it (with no grain co compensation) even though his basis was much narrower than the spot basis at the time he cancelled.

I also agree with your fourth point about informing grain companies of impending difficulties as soon as they become apparent. That, too, is a tough sell. Maybe because there are three "groups" that are high on many farm manager's suspicious list - bankers, grain cos and railways.

[TOM4CWB]

Lee,

The saddest part of what you have just pointed out, is that the TRUST in our industry is at an all time low.

Somehow many farmers believe that grain companies, and railways, have it "easy" and that they "owe" us as farmers.

I read an interesting discription of WAR.

"Origin of Wars: Couvetousness. The desire to get that which belongs to others. This has been the cause of most wars."

Many would say that the Prairie grain industry has been in a perpetuial state of war for many years.

The lack of respect of some one elses property, intelectuial or real is fueling this war.

An unfilled basis contract is the property of the grain company, and is not like a futures position.

This is why the fellow who had his basis "forgiven" was right to feel relieved and well treated to not have to deliver it.

I have not met an elevator manager, who if it was possible, would give me the grade advantage on the sale of my grain.

The art of marketing is knowing the possible, and the reasonable.

And Lee, it doesn't matter which grain company I deal with, and it has been all of them, they all want my return business, and if I am honest with them they will do just about anything "possible" to keep my business!!!

Now is this not the secret to today's succsesful farm?

[ianben]

No trust and not understanding the other guys problems are a real dis-advantage we farmers should tackle.It is not their fault if we over produce and are willing to sell cheaply.
I agree with Tom be honest and usually they do their best for you.
Likewise other farmers we see as competitors.
Are things as they seem from our side of the fence?
Do we all have the same difficulties?
Is anyone making a good living at todays prices even with a subsidy?

[Steve]

Computers made it easy for farmers to utilizing hindsight values by entering the past market performance over a few years and interpolating, averaging and whatever to come up with a seeding and marketing plan for the coming season. This is good reasoning to take into account the worldwide carryover, supply, demand, input cost and calculate the weather risk. In the real world it doesn’t work that well because we missed the most important factor, the mad gambler that doesn’t care about supply, demand and the farmer that will sell to cheap.

The commodity marketing futures is the meeting place for the seller and buyer also nasty speculators who are hard to predict, but in some cases it is to our advantage. Some of the grain production estimates that farmers rely on may look like a counter fit dollar bill at times and that adds to the marketing gamble.

Marketing on the futures is a gamble so the rule should still apply only gamble with what you can afford to lose. We can turn the page on that one, if you could afford to lose that amount you really didn’t need the gain.

I may be a bit pessimistic on this type of marketing but have seen many farmers not understanding the risk involved and end up in a financial chaos.

I have a question for farmers who sell canola and buy back options on the futures, what is your percentage gain to your total farm income by using that method to gain a better profit???????? You can use an average over a few years.

Also my second question is WHO do you think should be in charge and allocate the railway cars to the users?????????

To analyze the above statements and plan your seeding and marketing is like saying it rained in July 23rd in 1998 so it should rain on the same date in 2002, also grow wheat because there is going to be a shortage.

I always followed a good crop rotation and never chased the grain or oil seed market on predicted surplus or shortages. I know some farmers think they can out smart the world and grow the right crop and get rich or pay off all their debt in one lucky year.

I believe that is very hard to accomplish, because all the smart ones are on the same wavelength worldwide

[TOM4CWB]

Steve,

I believe that today's farmer needs to look at what pays the bills, cash flow, and profit margin.

The reason a farm is in trouble today, is if cash flow, cannot pay all the bills.

Now if I pre price, and buy options back, I can cash flow everything including the cost of the options.

Now your statement about farmers selling too cheap, that is simply a matter of what the cost is for the farm, what cash flows are to be met, and wether an overall profit is being produced by doing a specific sale transaction.

The beauty of the pea market this year is that if a farmer needed $5.00/bu for his feed peas, the market offered it to him. The market also offered $4.00/bu, and if that was all he expected, and could live with that $4.00/bu was fair for him too.

The fellow that sold at $4.00/bu and the fellow who sold at $5.00 were both treated fairly, and neither can complain.

Was 4.00/bu too cheap?

I do not believe it was, but the fellow selling at $4.00/bu allowed the $5.00/bu price to come about.

Substitution is a sneeky animal that will kill a market, if that market is not willing to be fluid and supply the needed product when demand occurs.

If we do the supplying, then an investment and stability happens in our market.

If we outright refuse to supply, substitution will often not give a second chance, or if that chance occurs a cost far above the value of the first sustitution cost will be extracted from us as if to prove we are really serious about wanting this specific market back.

This is why the CWB "theory" about the single desk "extracting" a "premium" is so short sighted.

It is clear that the CWB, according to Adrian Measner and Greg Arison, MUST BE COMPETITIVE.

I believe that the human consumption $6.25/bu Pea and Oat$3.50/bu market are excellent examples of why a "choice" marketing system is the fairest when it especially comes to drought years.

Why should the farmer in Milk River not be able to sell his 5 bu/ac winter wheat crop to a US marketer at the fair market price value?

Instead the CWB system says the buy-back must extract back this drought "premium" and pay it to me, who harvested a good crop at 50bu/ac through the pooling accounts.

Is this fair?

[Steve]

Farmers should know the food chain. [Just coffee shop talk]

I am sure you all heard farmers say the middleman makes a big profit on a loaf of bread, because he sells it for a dollar and only pays the poor farmer less then ten cents for the wheat that goes into it.

Farmers let’s take a positive look at the middleman and his big profit and analyze the process the wheat goes through to become a loaf of bread.
We can start by purchasing land to build a flourmill and wheat storage bins. Next step is the construction of the buildings and the instillation of the equipment. Labor unions are involved that can disrupt and add to the cost of the building. The same problem farmers have when labor unions stop grain transportation and handling by demanding bigger wages and benefits.

Now lets look at the positive side of the employee and I know some have their priorities mixed up which are not any different than farmers, but also need the money to pay their bills. The farmer may feel that he is not making any money but can sell out in his senior years and use that money as a pension. This farm could be sold to family members. The employee does not have that option so he or she is continually trying to force the employer to pay higher wages and pensions.

Now back to the loaf of bread. The flourmill company have to secure a supply of good quality wheat at a premium to keep the mill working. This wheat has to be transported from the grain elevator to the flourmill and add elevation charges to that. [ Lets leave the CWB out of this one and give to a rest.]
Then the wheat has to be processed, milled, packaged, stored and the flour has to be marketed. There is also competition in this field so the mills have to maintain good quality, price and service to stay in business. They also have the same problem as the farmers with surplus and or poor quality.

Next on the chain is the bakery with more buildings, equipment, transportation, packaging and additives to the bread to satisfy the customer. People want fresh daily bread so the production has to be controlled. This operation needs more employees.

The final step is the store with more builds, equipment, employees and competition.
The escalating cost of equipment replacement, and employees wage increases are all the same in the chain of that loaf including the poor farmer’s.

I just wanted to point out that the 90 cents per loaf employs a lot of people who eat that bread and that is why the farmer can sell his grain. Some of the employees get laid off and others work for a minimum wages. I think this makes farming look a little better.

[TOM4CWB]

Steve,

I agree with you about the bread.

Besides if I really was offended I could just use my own mill and bread maker, and that 9 cents of wheat, and a little yeast and power, presto I can make a litte money in my own kitchen.

And almost any other Canadian can do the same.....

I can only change my own operation and make it more efficient, but unfortunately the CWB by law is forced upon me, therefore I must try to change it as well....

Steve, wouldn't you agree that I should be able to sell my own wheat,not useing any CWB services or elevator grain handling systems, without being forced to deal with the CWB system///

I can mill, mix and bake, and then eat a loaf of bread produced on my farm without CWB interference, why can't I sell my wheat witrhout their unwanted help?????

[Steve]

Tom4CWB

Yes we need changes in the CWB performance and they will come about in time, but because of Government bureaucracy it takes longer. The reason I am saying that change is on the way, because we see deregulations in other industries.

I think we should have patience with changes and this would give some people time to understand them a little better.

There are a lot more farmers to change, then to deregulate an industry with just a few large corporations. It is hard to make an old horse do new tricks but do we know if the new ones are much better.

By reading between the lines in most of your comments I would say your farming operation is successful even with the present CWB performance, but keep after them and changes will come.

Steve

[ianben]

Hi Steve
You are giving sound advice here.
I too try to follow a good rotation and market in an orderly way not holding out for the last dollar.
I do feel however there is perhaps a better way to market today which would help smooth out the highs and lows of both production and price and give EVERYONE in the food chain a better deal.
I also feel sorry for the guys we buy from how do they know how many combines tractors chemicals to produce when our demand is so irratic.
They fix prices are prepared to hold stocks and supply demand which they then replace.
This is how I would love to operate.
Toms futures options will never achieve this with or without the CWB. In fact I think they make the highs higher and the lows lower.
Why is a 19th century system the only way to market today?
I hate wingeing, takeing government handouts, producing more in an over supplied market.
Just show me a better way.
I dont believe old dogs could not learn new tricks especially ones that help everyones bottom line.

Regards Ian