Farmers are getting headaches wondering what to do about pricing wheat now that prices are high but signals are mixed.
They must wrestle with whether to lock in prices now through Canadian Wheat Board pricing programs or take a chance on the pools. However, now they also have to weigh the dangers of committing their expected wheat production before the threat of Jack Frost has left the building.
It’s a situation created by the powerful rally that happened in futures markets in July and early August, and by the tremendous leap in CWB Pool Return Outlook prices that were announced Aug. 26.
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Before the PRO values leaped, the CWB’s Fixed Price Contract (FPC) was offering prices that appeared to be the product of a possibly short-lived rally sparked by the Russian drought. That inspired many farmers to lock in some prices that were rising well above the PRO.
The decision seemed sensible because many analysts have been arguing for weeks that the fundamental supply and demand situation for wheat did not support the rally, or at least did not give it support for the medium and long terms. They argued that the world is still flush with wheat of all kinds and that Russia’s retreat from the export market was not a huge deal.
Indeed, wheat board officials at times sounded that same note, pointing out the access to futures prices offered by the FPC and discussing the overall situation of adequate wheat stocks
So that’s why many farmers were caught by surprise when the wheat board significantly increased PRO values, jumping 1 CWRS 13.5 to $7.57 per bushel (before deductions) from $6.12 just one month earlier.
That means the board now expects its overall returns for 1 CWRS 13.5 to equal that amount, which suggests it thinks it will be able to sell at near current futures values for months to come. So much for it being a short-term rally.
The situation has forced marketing advisers to read the tea leaves and assess how to alter their marketing advice.
I called a few to see what they’re recommending, and the sense I got was that the PRO increase has reduced much of the pressure to price quickly, which might be a good thing considering that frost is still a risk in most areas.
“If I haven’t harvested my wheat yet, I would just sit tight,” said Jon Driedger of FarmLink Marketing Solutions.
“With the very sharp jump to the pools, and we have an FPC that’s at very similar value, if I wasn’t 100 percent sure what I had in terms of quality and so forth, I would just sit tight.”
His firm advised producers to lock in some sales during the rally, so his note of caution is for farmers who have already made sales.
For those who have made none: “Keep an eye on it. It’s a little easier to sit back if you know you have a little locked in at a pretty good price.”
Derek Squair of Agri-Trend Marketing said his company has moved most producers to about 30 percent sold in new crop wheat using the FPC. Once supplies are safe from frost, it will use the FPC to lock in the rest over the course of the crop year.
He’s skeptical that the board can maintain present PRO values and wants his farmers to stay out of the pools.
“We’re sticking with the fixed price through the year,” Squair said. “We don’t really feel that the PRO is an accurate reflection of where the board’s going to be. It’s pretty aggressive.”
Changes of this magnitude in PRO prices are rare, but they highlight a problem that marketing expert Charlie Pearson of Alberta Agriculture thinks the board needs to fix.
“The board needs to be able to do PROs on an as-needed basis,” said Pearson, noting some board producer options ended “way out of whack” with underlying PRO values, creating unneeded confusion with farmers.
“If the market makes a big move, then put out an interim PRO to reflect the move.”
The wheat board has released extra market commentaries and highlighted the price surge since it began, but situations like this reveal the flaws of a signal such as the PRO, which comes out once a month and doesn’t well represent significant short-term changes in the market.
That can be good if market moves are just blips that won’t have big pool price impacts. As well, a lagging indicator can give a better long-term view of overall prices than more jumpy short term measures.
However, this huge leap in PRO values suggests that Pearson is probably right about the need for interim PROs.
Corporations that are going to make major revisions to earnings often issue advisories to analysts to avoid blindsiding investors. The board could do the same for farmers and make its most crucial signal a little clearer in exceptional times.
