Thousands of farmers might be caught exposed because of the sodden spring, but the recent market downturn is offering them a handy fig leaf to partially hide behind.
Farmers in many areas will be unable to meet their existing new crop sales agreements because they won’t be able to harvest most of their crops.
Others have short futures positions they will need to roll out of because they won’t have a crop with which to back them up.
Fortunately, the recent drop in crop prices has made it less costly to get out of those commitments.
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“With the canola market dropping, they are escaping,” said Errol Anderson of Pro Market Communications in Calgary.
“I think the market, luckily, will allow them to get out without major penalties.”
Farmers use a wide range of strategies to hedge their price risk, using deferred delivery contracts, other production contracts, futures contracts and options contracts.
Many advisers recommend farmers lock in prices for 25 and 40 percent of their expected production before the end of seeding so that profit margins can be protected. Locking in 25 to 33 percent of their production is considered safe for the average farmer because only in rare years do they harvest that low an amount of crop.
But this year, like last year, is one of those bad years for growers who have been unable to seed that amount of acreage.
Futures positions are easy to roll out of, and with canola prices recently falling well below $600 per tonne, many farmers with short positions will be able to gain from closing out.
But it isn’t as easy to get out of production contracts, in which a farmer promises to produce a set amount of crop with a grain company. The buyer isn’t just speculating with price, but actually wants the crop.
As a result, many advisers say farmers who won’t have physical product in the fall should start talking to the companies with which they have contract commitments.
“For anybody who has a contract, I think I’d want to be getting out of it quick, because there’s a really good chance of (oats prices) really running up quickly,” said Bill Wilton, president of the Prairie Oat Growers Association (POGA).
Oats is one of the most-contracted crops on the Prairies, and contracts generally don’t contain act-of-God clauses.
Ken Ball of Union Securities said farmers who move quickly to cover their contracts don’t have to deal with grain companies at the worst time.
“Most guys have learned that when these things happen, you move fast,” said Ball, who has a number of clients with production contracts they can’t fill.
“Move before the grain companies have time to bump up their penalties and their charges for buying your way out of a contract.”
Farmers in many areas had done little forward contracting or pricing before spring because of soil left soaking last fall, which means the problem might not be as widespread as it would have been had the fall and winter been dry.
Years of excessively wet conditions in Manitoba’s Interlake have made farmers so conservative with pricing that they price almost nothing, said Lorne Floyd, POGA’s Manitoba vice-president.
“We’ve had so many challenges over the years, not too many farmers are selling anything before it’s in the bin.”
That has been a successful strategy this year for avoiding exposure with production problems.
Many of the best pricing strategies have been option-based because options do not commit a farmer to anything beyond the premium they paid for the option.
Anderson said using put options this spring for fall sales was a “no-brainer” for anyone who was worried about being able to produce a crop.
And fall prices are still good, above $11 per bushel for canola, if farmers still want to price new crop but are worried about their production prospects.
He said some farmers are dealing with production problems by buying fall call options.
