Farming Your Money Where are the brokers?

Paul Kuntz

Paul Kuntz is the owner of Wheatland Financial. He offers financial consulting and debt broker services. Kuntz is also an advisor with Global Ag Risk Solutions. He can be reached through wheatlandfinancial.ca.

Where are the brokers?

I have spoken about the commodity price boom that has the potential to add massive revenue to grain farms across Western Canada. The current and future prices look very promising. Now we need to have a commodity in order to enjoy the commodity price. Hopefully Mother Nature will bless us with a crop.

These high commodity prices have farmers wondering what this will do to expenses. Oftentimes we see expenses go up when revenue goes up. This can outstrip any benefits the rise in prices brings. It has led to me to wonder if we need a better system.

Farmers have the ability to lock in grain prices on certain commodities for up to two years. You can lock in this crop and next year’s crop price. To go out to the second year might take some planning. Your local elevator may not have a specific deferred deliver contract for a crop two years out but if you use a commodity broker, you can use the futures market to protect a price. You will be limited to what is traded. If you want to protect durum wheat, there is no contract for that. Same with barley, peas, lentils and others. You can protect wheat and canola.

When it comes to protecting your expenses, there are options. Farmers often pre-buy their fertilizer long before planting and typically save money. This year it saved a large amount of money. Fertilizer prices right at planting time in 2021 are very high. If you purchased later in 2020 or in early in 2021, there were great savings. But what about 2022? What will fertilizer prices be? If you have the storage and money, you can start buying fertilizer as soon as the price drops. But what if the price does not drop? What if the fertilizer prices for 2022 simply remain high? It would have been nice to have a system to lock the price in late 2020 for 2022 and beyond.

These high commodity prices have farmers wondering what this will do to expenses. Often times we see expenses go up when revenue goes up. This can outstrip any benefits the rise in prices brings. It has led to me to wonder if we need a better system.

Fuel is another expense that may see increases but unless you can buy it and store it, there is no protection.

If your rental agreement expires this year, there is a good chance your landlord will expect more rent going forward. Based on the grain prices, landlords will expect a chunk of that windfall. Equipment prices have been going up partially because

IMPROVING THE QUALITY OF FARM ADVICE

Change is accelerating and complexity is increasing

Now more than ever, farmers need advisors who understand the business of farming.

Contact your CAFA® farm advisor today!

 

www.cafanet.ca

As farmers we do not need to have a broker in every town, but we need a system that is more inviting. We need to take a system of institutional investing and make it more retail. We need creativity to create contracts that protect fertilizer prices. We need buyers to offer price protection farther out than two years.

of supply/demand issues COVID-19 caused. The increase in grain prices will add demand pressure and I am sure will see a larger than usual increase in equipment prices.

All of this can have an adverse effect going forward. Think about this scenario: Rent increases on your five-year term, loan payments increase on your equipment purchase and that is over seven years, fertilizer prices remain where they are, fuel goes up, and two or three years from now and we are back to $11/bushel canola and $6.50/bushel wheat. What will this do to your budget?

So many expenses farmers have are contracted out over several years. Your rent, equipment payments, and mortgage payments are some examples. But if you want to contract your income, the best you can do is go out two years and basically only on two crops. The lack of ability to contract income is not just limited to the future years, it is riddled with one-sided risk. If you sign a deferred delivery contract, you are obligated to deliver grain against it. If you cannot there are penalties and if the price has moved against you, the penalties are worse. If you take a position in the futures market, a change in prices can be very costly. There are other tools such as options that are less risky but they carry other risks like expiring worthless or not receiving their true value.

I spoke with Errol Anderson of ProMarket Wire out of Calgary, Alta., about the availability of options for farmers for either revenue or expense protection. Anderson explained that two years is all you can go out on the futures market to get price protection. As for expense protection, he explained there really are no options. Although fertilizer is traded on an exchange, the contract sizes are not meant for farmers, nor is there enough

liquidity to provide protection. Anderson also explained that in the past they would use natural gas futures to protect the price of nitrogen fertilizer as that is a key ingredient. That practice has since become fruitless because the markets do not always react in unison.

There has been a lot of improvements in the area of price protection for grain. I think back to the ‘80s and ‘90s. You had your local elevator and you phoned in for a price. Hopefully you caught the market at the right time. Since then, we have seen targets come into play, basis contracts, certain commodities carry an Act of God clause, apps on our phones updating prices by the minute, end-users like canola crushing plants becoming direct buyers and the list goes on.

I still feel like industry and farmers could do more. As farmers, we should all get to know someone like Anderson. When I think of how many farmers we have in Western Canada, there should be a commodity broker on every corner, but the opposite is true. There are very few true commodity brokers out there. They are hard to find. A very small percentage of farmers have trading accounts. So, farmers need to do more. Industry also needs to improve access. We see grain companies offering broker-type services which is good, but it would be better if there were also independent companies also offering services. Think back to the ‘80s. If you had some money to invest and you wanted it to go into the stock market, that would have been a tall task. You would have needed to find a stock broker at a brokerage who had a seat on the exchange. That service was reserved for wealthy sophisticated investors. The rest of us were stuck with term deposits and GICs. Now, you can walk into any credit union or bank and buy equities in a mutual fund. You can walk in with $50 and set it up. They are everywhere.

As farmers we do not need to have a broker in every town, but we need a system that is more inviting. We need to take a system of institutional investing and make it more retail. We need creativity to create contracts that protect fertilizer prices. We need buyers to offer price protection farther out than two years. We need contracts that offer some protection to farmers in the event of crop failure.

We need a system that provides more protection. My fear is $100/acre rent, $1.1 million combines, $1,400/tonne phos and $11/bu canola.