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Business strategies for a down market

The bears are out, but here are some ways to manage through a time of tight margins and high risks

The grain market bears are out in full force, but while times are challenging, there are ways to manage through the latest downward cycle, say four Alberta farm leaders.

“In 1980 — 35 years ago — I was selling spring wheat for $6 a bushel,” said Gary Stanford, president of the Grain Growers of Canada. “Today, it’s like $6.50 a bushel. It’s a good thing we have better technology and better farming methods so that we can get better yields. Where I used to get 30 or 35 bushels per acre on dryland, now I’m getting up to 55 bushels.”

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The Magrath producer knows the odds of any price increase is slim. In fact the outlook is getting gloomier with market analysts now saying “the world is awash in wheat.

Canola prices are also disappointing by recent standards, says Sexsmith producer Greg Sears.

“We aren’t seeing the commodity prices that we’ve got used to in the last five or eight years,” said the vice-chair of the Alberta Canola Producers Commission. “Ten-dollar canola used to be a good price, and now it’s not a great price.”

The steep fall in the loonie has shielded Canadian growers from the drop in world prices, but is also raising some costs.

“It is concerning when your input and machinery costs keep going up,” said Stanford. “With the Canadian dollar going lower compared to the U.S. dollar, all of our farm machinery and parts are getting more expensive.”

That’s also a concern for Humphrey Banack.

“Margins are very tight in agriculture as a whole, so it’s going to be a challenge,” said the Round Hill producer, who is also vice-president of the Canadian Federation of Agriculture. That increases the importance of making your dollar go as far as possible. He pointed to urea, which has fallen by US$100 a short ton over the past year.

“It may work out well for farmers because there seems to be a glut in the world on fertilizer,” said Banack.

But he won’t wager that fertilizer prices will stay low or that crop prices won’t go lower.

“There’s risk management tools out there you can use. We’ll be looking to lock in the price of our fertilizers, and we’re looking to forward price some of these profitable prices for a crop we haven’t even really contemplated seeding yet.

“We’ll manage how we’ll sell the crop we have in the bin, and take advantage of profitable times. That’s the best we can do.”

Bright spot

But it was one of those profitable times for those who grew pulses — and got a decent crop — this year.

Allison Ammeter

Allison Ammeter
photo: Supplied

“At all of the zone meetings this year, the message (provincial market analyst) Neil Blue gave us was that wheat, barley, and canola are all ‘low and stable,’ which are not words we want to hear,” said Allison Ammeter, chair of Alberta Pulse Growers.

“And then he showed pulses, and they’re just in an absolutely fabulous place.”

Two consecutive droughts in India sent prices for chickpeas, yellow peas and lentils to record highs, and Canada is the country’s largest supplier. So analysts are predicting a jump in pulse acres, but Ammeter has a word of caution.

“That’s this year. Next year, wheat might be high, and the next year, barley might be high,” said the Sylvain Lake producer.

“Prices on lentils are through the roof, and you can bet next year we’ll have a ton of lentils. Unfortunately as farmers, we always seem to be one year behind because we react to what’s happened. But we do react — we adjust our rotation a little bit all the time for what we know is going to give us a good return.”

But adjusting doesn’t mean going overboard, she added.

“We try to keep a solid four-year rotation because that’s what’s best for the soil and for keeping diseases down.”

Ammeter and husband Mike also incorporate nitrogen-fixing pulses into her crop rotation to cut back on input costs.

“By adding, keeping, or increasing pulses in your rotation, you have the ability to save on nitrogen costs, which is one of our major input expenses,” she said.

Stanford, who farms with his two sons, starts his crop planning by pencilling with a reasonable gross rate of return for all of the crops they grow.

“Then we start working backwards on our inputs,” he said. “What I’m doing on my farm is looking at a gross return and see what kinds of crops we can get away with that have less expenses.

“We soil tested all the land this fall, and then we looked at it to see how much inputs we were going to have to put in for each crop. On a flax crop, it looks like we could save ourselves $60 or $70 an acre — maybe even up to $100 an acre — in inputs. So then we look at the price and what the price is going to be next fall.”

Pulse prices look to have some continuing strength in the coming year, he said, but he will also “diversify a little bit” by growing crops like alfalfa.

Sears is also looking to “tighten up on the input side of things.”

“I’m paying more attention to the cost of production, like going to less expensive crop protection products and trying to apply only what’s needed,” he said.

“Our weed situation has been relatively under control for the last few years, so maybe we can get away with not attacking those weeds we’ve chosen the more expensive chemistries for.”

‘Risky business’

When forward contracting, Banack doesn’t aim to hit home runs.

“We delivered canola last week that we pre-priced last year at a very profitable margin, just short of $10 a bushel,” he said. “Right now, the cash price is over $10 a bushel. But we look at that as a cost of doing business.

“There’s ways to manage around it by keeping close tabs on your expenses. It all comes down to management. With forward contracting, some people aren’t comfortable with that, but you have to manage the best way you can to lock in profits. If you’re just going to grow a crop, harvest it, and then decide to sell it, it’s a very risky business.”

Producers will also need to pay more attention to the “specials,” added Sears.

“You have to look more for those spot prices and bumps in the market that you can take advantage of.”

He also builds “contingencies” into his cash flow by knowing both his fixed and variable costs.

“There’s different forms of lending that producers have taken advantage of that can either rope them into a corner with debt repayment or provide flexibility with debt repayment,” said Sears.

“Understanding how their individual farm is set up can go a long way to managing around the odd bump in the road.”

Another risk-management strategy on the Ammeter farm is having some cash in reserve to deal with swings in grain prices.

“I remember the year where we had just an absolute ton of light barley, and the prices were so low,” she said. “But then there are years you get hailed out and the prices are high. We not only deal with fluctuating grain prices; we deal with fluctuating quality and fluctuating quantity. That’s called farming.”

But the Ammeters won’t cut back on nutrients and herbicides if it threatens longer-term soil fertility or causes weed management issues.

And using a “full crop rotation” helps with price swings, she added.

“There will always be one commodity with low prices in a year, or one for which the weather was not particularly conducive, and rarely is it the same one in the same place each year.

“As that is very difficult, if not impossible to predict, our best hedge is to grow a rotation of several crops each year.”

The old saying about the best cure for high prices came up more than once, but in different contexts.

“We’ve gone through some good times where farmers are willing to pay those extra dollars to get that land base, but that’s going to change,” said Banack. “High prices cure high prices, so we’ll see how this all works out. But I’m optimistic.”

Ammeter flipped the saying on its head, and said it might be a good time for some contrarian thinking.

“Low prices don’t stay low forever, either,” she said. “Prices on wheat are low, and you can bet there will be a lot of people not planting as much wheat next year.”

About the author

Reporter

Jennifer Blair is a Red Deer-based reporter with a post-secondary education in professional writing and nearly 10 years of experience in corporate communications, policy development, and journalism. She's spent half of her career telling stories about an industry she loves for an audience she admires--the farmers who work every day to build a better agriculture industry in Alberta.

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