Today's Farmer

[TOM4CWB]

Kernel,

Guess what, if I go shopping on a certain day of the month, I can get everything 15% off.

And I am sure if you asked a fresh produce grower, of potato grower about the commodity situation, they would complain just the way we do about the ups and downs of grocery prices, cheap Mexico and South American products undercutting etc. etc. etc.

Then ask the local Co-op about the Walmart and Superstore in the next bigger uban centre, and how they compete on a commodity basis with the big box stores...

When I buy fertiliser or farm chemicals, it is exactly the same, the lowest priced outlet, with the best service gets the business, and many claim they work on 3% margins.

Again if you can find a fairer way to guess what supplies will be needed than by what signals the futures give, in black and white, that I can take to the bank and cash flow, let me know.

Most pooling accounts including the CWB's are cash pooling with a small percentage of basis pricing done more than 2 to 3 months in advance.

I appreciate a price signal I can take to the bank.

And yes all my Canola was sold off the combine, with all the basis forward booked before it was planted.

Will I do this again this year?

Maybe not as much this year as we have less reserve moisture, therefore more production risk.

If there is no risk there will be very very little reward!!!

Kernel there are production contracts on specialty Canola that allow complete pricing on the whole crop with no basis or futures risk, therefore these types of sales opportunities do exist, just look around.
With all the extra drought risk, more and more will be offered I will be willing to bet!

What do you think?

[chaffmeister]

I agree with Ianben – farmers’ customers want stable prices and supply. However, I also disagree with him – I believe our “markets” do indeed provide this.

Buyers of farm production - food processors and manufacturers - operate in a global market characterized by fluctuating supplies of raw materials, due in part by people’s action, reaction or inaction and, in part by Mother Nature. On the other hand, demand is fairly steady – as population grows, so does the demand for food; as economies around the world improve, so does diet and so there are some macro-level shifts in demand for some products at the expense of others. There is some substitution between different raw materials but not much. Exception is in the feed market – just look at how cheap US corn is rationing demand for barley. Also, beef, chicken and pork compete for the consumer dollar; if beef gets too dear, demand for pork and chicken climbs.)

Clearly the most dynamic portion of the food chain is in raw material production or supply. It is the segment that we have the least control over and has the habit of changing, at times dramatically, taking price with it where it needs to go on the basis of simple supply and demand. In my view, the only way you will be able to stabilize price through the balancing of supply to demand is to produce just what the market wants – no more, no less – consistently every year. Not only would we as a global society need to control the production/supply of raw materials around the world, we would also need to be able to forecast with absolute certainty what people will want to eat throughout the next 12 months. If people are doing well, they eat more meat; if they are economically disadvantaged, they eat more Kraft Dinner.

If someone can figure out how to control production, they would be a candidate for the Nobel Peace Prize. If someone can project human consumption patterns, they could “write their own ticket” with any food company.

I hold the opinion that we cannot control raw material production and we cannot determine what people will be eating in a year’s time (nor can we dictate what they eat). I also think that fixing prices will not work (possibly a topic for another discussion). Therefore, we are stuck with markets that will change in price, responding to market conditions. And this means all agricultural markets – not just those with futures markets. Anyone notice the price of mustard these days?

Ianben also asks “How much easier is it to budget, plan investments if you are confident on price and supply?” I think it was a rhetorical question – obviously it’s easier when you have solid price and supply inputs. The thing we need to recognize – and this is the point I have been leading up to – is that food processors are very much confident on price and supply, even in a volatile market place, because they forward-price and procure using futures markets. If they don’t use the futures markets directly, their suppliers certainly do. Either way, they clearly benefit from the ability to lock in prices and supplies with the currently available market tools.

Unlike Ianben, I do not believe “Our buyers must constantly watch the market and try to manage their risk. We supply a constant worry and additional costs”. Ingredient buyers are much more comfortable with those ingredients that are locked in over a long period (like flour, oil and meats); they are much more vigilant on those ingredients where they have exposure. And if they have exposure, they try to lay off the risk onto a supplier, who will charge dearly for the risk, or lose a lot of money (ask anyone who traded mustard this year). Rather than additional costs, hedging through futures reduces costs as it reduces risk.

We have been through a long stretch of low prices brought on by over supply (because of subsidies) and to look for solutions is healthy and necessary. But I get concerned when I see that the futures market and speculators are seen as the villain. Without futures markets, farming would be even tougher than it is. And without speculators, the futures markets wouldn’t work nor provide any benefits to farmers. I am not prescribing that farmers trade futures or even use them to hedge. But because of futures, prices are better than where they would be and buyers (grain companies) can offer long term price stability (forward pricing) because of them.

[TOM4CWB]

Chaffmeister,

The cost of production, and a fair return are two issues that are normally used in complaining about prices being too low.

However the people who had a reasonable crop "need" much less than those who had 50% of normal.

Now the "fair" distribution of returns relating to cost of production is the real issue.

It seems in western Canada that our crop insurance programs are really letting us down, which is not really the global markets "fault". Prices are determined by supply and demand, and western Canadian grain producers are among the most efficient in the world.

Production risk however is high over a large expance of the prairies, and this then becomes a big issue to those who are hurt by natural disasters.

I believe for those who had a "normal" crop prices are "profitable" but for those who did not.....

And this is why possibly it is not fair to say a failure of the marketing system occured. Now adding subsidies to this mix really complicates and throws markets out of kilter.

We know that both weather and subsidies are going to affect our "cost of production" and individual profitability. Handling these risks in the most efficient manner, isn't this the question that would be the most productive to answer?

[chaffmeister]

Hey Tom:
You bring up another good issue. Is current crop insurance set up the most effective way it could be? What should crop insurance look like? Who should offer and underwrite it? How much should it cost? What should it cover? All good questions that I think those that are currently involved in crop insurance need to ask.

But here's another question for you - how do you factor in the guy who doesn't insure?

[TOM4CWB]

Chaffmeister,

If the saftey net programs were effective and fair, then the people who did not use them would not have the right to complain, even though we know they would anyway!!!

This is a real issue, and the provincial and federal governments must put together better programs that are more efficient and effective.

The world changes, and yesterday's solutions are many times part of tommorows problems.

Change is the only constant, and as we are creatures of habit...

Got any revolutionary ideas on saftey nets?

[ianben]

Could there be a way to help farmers store the crop from the good years to the bad.
If we use cost of production on a yearly basis whereever in the world has a bumper harvest sets the price for us all.
This is where I think the present system falls down. This does not fix a sustainable price. There will always be somewhere in the world with a bumper harvest.
The present system finds this local surplus and uses it to fix price world wide.The Ukraine I believe won on wheat this year 10million tonnes extra so we all take their price of production.Perhaps they will be importers again next year. Crazy!!
The mere perception is enough and the quantity insignificant in real terms.

The answer must lie in a system which encourages individual farmers to store the good years as insurance for the bad.

It works with money is that not the role a bank plays for the individual.

What about a grain bank?

Save in the good years, Borrow in the bad.

Would that be a better way?

Regards Ian

[Steve]

The three basic problems the farmers have are supply, demand and price, which are all very hard to control. These problems flare out to make the food chain extremely complex because it involves every person on earth, the main reason we all need to eat.

The weather plays the largest part in supply and the demand is to some extent controlled by affordability, the hungry people don’t have money to buy what we produce.

We are all very independent in this good free world of ours, which means there is competition but this also creates problems in some parts of the food chain.

In the free world every person has a chance to be an individual therefore it is going to be very hard or maybe impossible to come up with a marketing system to satisfy everybody’s goal. With the present marketing some have a variety of wrong reasons why they are having cash flow problems and going broke. I will reframe from listing some because it surely would open a can of worms.

The crop insurance would be good and manageable if all the farmers would participate and treat it as input cost, every year not just when they think it will be needed. We could treat it like car insurance, always have it and use when you need it. [ this was forced on us by law but I think is good ]

At the present just a small percentage buy crop insurance and want the premiums back if it is not activated due to an average crop.

We can see where part of the problem could be our independence.

Farmers from all grain producing countries should send a strong representation to the world trade meetings. They should promote the idea that the world Governments could buy surplus grain at a fair price and feed the hungry and GIVE THEM FOOD NOT GUNS.

I believe this would help stabilize grain prices, also subsidies because the surplus is not there it is just the hungry have no money.

[cowman]

Steve: you lost me there when you said"this was forced on us but this is good" Are you saying we should be forced to participate in crop insurance? How about we should be forced to grow whatever the govt. decides? This is a slippery slope you are on here! What is best for the majority or what is best for me? Who decides? We have that wonderful institution(CWB) that already adheres to these principals!
As far as "give them food instead of guns" you just don't get it! There is ALWAYS money available for guns!!!! We don't need to give them money for guns...they have it...usually because they won't feed their people! And hey, if we give them food they can buy even more guns!

[Steve]

Cowman: I said that it is a good thing that all drivers should have car insurance and are you saying that it is up too the individual to decide if he needs it?

Someone asked earlier on if the crop insurance could be improved and my opinion is if we all worked together it is possible.

I also can see where the part that nobody is going to tell me what to do would eliminate that possibility.

The way I see it in most cases the end result is better to work together than against one another.

The thing about feeding poor people is a good idea and I would like to think that I always see the good side first.

[TOM4CWB]

Steve,

If crop insurance actually worked like auto insurance it would be a big improvement!!!

With auto insurance I am able to replace my machine with a simular model in simular condition.

If Crop Insurance paid my costs, like it will when I replace the vehicle that is damaged, then this would be a big step forward!

I am hoping that the Alberta government will take the Crop Insurance review seriously that Charlie Mayer did, But I won't hold my breath waiting for results!

A manditory system of insurance is cheaper to run, but...

If we can't even agree on crop insurance, how will we ever get a better marketing system?

[cowman]

There is a big difference between mandatory auto insurance and mandatory crop insurance. Mandatory auto insurance protects the other guy not you. Crop insurance protects only you. There are voluntary auto insurance policys(collision,comprehensive, etc) that protect you but they are NOT mandatory. Now if you get a loan from the bank they insist you take these out to protect them. I imagine the banks also want you to take out crop insurance if you owe them for crop inputs. The crop insurance scheme is just another subsidy. If it wasn't then the govt. should get out of it and let Mutual of Omaha take over. Hey, it might actually work then.

[ianben]

Is a subsidy a handout to farmers or food insurance for the public.
Surly these payments are made by our governments to insure a supply of cheap food.

[Steve]

The mandatory auto insurance is the same for everybody because you could be the other guy.

[cowman]

Steve: No. There is no other guy in crop insurance! Only me.

[TOM4CWB]

Cowman,

The other guy is actually the government, as when a weather disaster happens everyone goes running to them for compensation!!!

I hope a crop insurance program that comes closer to true cost of production can be created, as costs are higher each year therefore our risk is rising.

Younger and debt ridden farmers need crop insurance to control risk where farms that are close to debt free can self insure.