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Difficult decisions for farmers in a post-CWB environment

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Farmers are getting advice by the tonne as they prepare for the likelihood they'll be marketing their own wheat, durum and malt barley next August for the first time since their great-grandfathers were farming.

The Canadian Wheat Board has been part of most Prairie farming operations since 1943 when the federal government caved to pressure from the farm lobby to make the board the sole marketer for western grains. Unless one of the pending court cases calls a time out, that will change Aug. 1.

A few farmers attending Manitoba Ag Days earlier this month were taken aback by how many decisions they need to make. It turns out this wheat marketing is rather a risky business.

With the exception of some specialty canola oils that are grown under contract, canola is canola. Its wide variety of end uses are defined after it is crushed into oil.

The end uses for wheat are predetermined by the class of wheat farmers plant, such as whether it is a high-protein milling type, noodle variety or suitable for ethanol.

In the old days, farmers tended to grow what they grow best. They could sell grains for domestic industrial use or livestock feed without going through the board. But if it was sold for human consumption or export, the board was in charge of selling it.

Market analysts and consultants are consistently warning farmers to make sure they read the fine print of any contracts before they sign and to shop their grain around to make sure they are getting the best possible price for the quality and type they have.

"If you haven't used brokers or futures markets as a way of hedging your pricing already on the crops that you're growing on the open market, I don't think wheat is the time to start," one well-intentioned consultant cautioned his audience at Ag Days last week.

Despite all the rhetoric about "marketing choice," most farmers will be delivering to the same elevators they frequent today.

The difference will be in how they price their grain and how they manage the risks associated with marketing it. Depending on your viewpoint, the mandatory pooling either negated the need for farmers to hedge their grain on the futures market or it deprived them of the opportunity.

Under a pooling system, all farmers delivering into the pool received an average of the proceeds from sales made over the entire year. So when they delivered to the elevator, they received an initial payment based on the grade they delivered, less any quality discounts. As the year progressed and the board had a better idea of how sales were going, those initial payments were topped up, sometimes two or three times.

In the open market, farmers need to find a way to manage the risk of price fluctuations between the time they grow their crop and deliver it for sale. They can either do that directly by working with a broker to buy futures and options to "hedge" that risk, or they can use a number of pricing contracts offered by grain companies.

The farmer might agree to sell what's in the bin with a click of the mouse. But once it gets to the elevator, there is what the market says grain of a certain type and quality is worth, and then there is what the grain company buying it says it is worth.

There are 23 downgrading factors used to assess wheat, compared to canola, which only has eight. Companies often apply those factors a little differently based on what they already have in their facilities and whether they can blend what the farmer is offering with other grain to get it into a higher-quality category.

In the midst of all this is the new Canadian Wheat Board, on one hand laying off staff in a "right-sizing" exercise and on the other, assuring producers it has people and experience farmers can trust.

The federal government is continuing to backstop the new board by guaranteeing its borrowings and initial payments for five years, much to the chagrin of the private trade with which it must now compete.

The simple truth is, the grain business is a thin-margin, high-volume business. And if news reports are accurate, the grain companies are planning to make a lot more money in the post-CWB environment.

The price of wheat hasn't gone up. If anything, it's going down as world stocks are replenished. So that means somebody is going to be making less. The battle is now between farmers and buyers to determine who that's going to be.

Laura Rance is editor of the Manitoba Co-operator. She can be reached at 792-4382 or by email: laura@fbcpublishing.com

Republished from the Winnipeg Free Press print edition January 28, 2012 B5

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