A major Canadian grain company wants to weld farmers into “value chains,” committing them to fixed price contracts for up to five years.
Kerry Hawkins, president of Cargill’s Canadian operations, said that within two years his company will be offering farmers long-term, fixed-price supply contracts.
He thinks higher-than-average prices will win fans.
“You’re going to find specific-trait canolas are going to get such a significant premium relative to traditional canola … many producers are going to want to shift,” Hawkins told the Manitoba Canola Growers Association during Manitoba Ag Days.
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Cargill wants to contract farmers to grow special varieties of canola demanded by its customers. Because the customers have special needs, they are willing to pay higher prices to get what they want.
But these customers do not want to make new contracts annually, in which supply and price are haggled out anew. They want long-term deals that fix their input prices and guarantee supply, Hawkins said. If their products rely on these raw materials, they can’t afford to run short or face price shocks.
Cargill, which will supply these specialized varieties of canola to buyers, will also want producers to lock into long-term price and quantity agreements so that Cargill will not be exposed.
Farmers may be used to selling grains and oilseeds on a year by year basis, and trying to capture market highs, but Hawkins said a good fixed price should be more attractive.
The price would be designed to cover a typical cost of production and also lock in a profit margin.
He said other companies are considering similar production contracts.
Some farmers may enjoy the gamble of cash and futures markets, but long-term relationships are part of a new way of doing business that gives everyone a good return, he said.
“Our industry is no longer being driven in commodity terms.
“Customers want customized product, not just the cheapest canola on the market.”
Hawkins said long-term contracts may not offer the possibility of a dramatic price spike. But few growers catch those price spikes.
And having a five-year contract with a profitable fixed price is a nice thing to have when negotiating an operating loan, Hawkins said.
