Contract squeeze worries farmers

Farmers across the Prairies face significant yield losses this year because of heat waves and lack of rain. Now they may not be able to fill earlier-signed production contracts. | Randy Vanderveen photo

CAMROSE, Alta — As heat and drought burn up crops across the Prairies, many farmers wonder if they will have enough crop to fill what they thought were modest production contracts.

“I worry about my barley because my barley is 70 percent priced and my canola is at 50 percent priced. A lot of farmers are panicking,” said Gilles Roy, a farmer at Falher, in Alberta’s Peace River region, which has had very little rain since seeding.

Strong feed barley prices before seeding enticed Roy to price much of his barley because good crops of barley are common .

But drought stopped the plants from growing and heat may have stopped the heads from filling. Inquiries into whether he could cancel or buy out his priced contract haven’t eased his concerns.

“I didn’t cancel out of any of mine. It is so expensive, the fee they want to charge you. It is up to $30 a tonne penalty they want to charge you. I will wait until I have it all in the bin and see how much I have.”

Then, Roy will begin negotiations on the missing bushels and any penalty.

“I want to know the terms before I haul one bushel.”

Bryan Woronuk of Rycroft said last year, grain companies were letting farmers out of their contracts with no penalty, just a promise to remember their good deed, but last year’s good will seems to have disappeared.

“I contracted what I thought was a conservative amount of grain and now wondering how it can be filled,” said Woronuk.

It’s a story heard across the Prairies, said grain marketer Derek Squair of Exceed Grain Marketing.

“I have customers who have average-sized crops and are not too concerned, but I have customers in poorer areas who maybe might get 25 percent of an average crop, which is quite devastating financially.

“Feed barley is one that keeps popping up because prices are quite good. We’ve never really seen that strong of prices for feed barley off the combine before. So, I think a lot of farmers will get caught. They maybe went a little further on feed barley because they were such good prices than they normally would and barley seems to be getting hit hard from drought,” said Squair, of Regina.

Not all grain companies are sympathetic to farmers who locked in tonnage and price and now can’t fill those contracts. Grain companies have already sold the grain, planned their sales and are now wondering if they will get grain for the price contracted.

“Some smaller, more nimble companies will let you roll contracts over to next year. They know they will get that volume sometime and they are comfortable with that. Other companies are just holding producers’ feet to the fire and asking for exorbitant buy-out clauses and will not give you a buy-out price,” said Squair.

For farmers who are unsure if they will have enough crop to fill their contract, good communication is key, said Derek Drey, regional manager for Saskatchewan North with FarmLink Marketing.

“The best thing to do is to start an open conversation. It is very difficult to exit out of most of these contracts. Whether you buy out or roll it over to the next crop year, there are different strategies you can work together with your buyer on.

“But unfortunately, it is not a simple phone call to cancel your contract or get even a cost to get out of the contract. That is why there is so much emotional pain right now when it comes to these contract buyouts,” said Drey, who farms west of Saskatoon.

Drey said last year he wasn’t able to fill his canola contract. As soon as he realized he wouldn’t have the required bushels he called the grain company. Luckily for Drey, the company allowed him to roll the contract over to the following year instead of paying out any penalty and money for the missing bushels.

“What that did for our farm is alleviate the cash flow pain of having to put physical funds out to buy out a contract. That was more of a favourable outcome,” he said.

“I have a lot of empathy for my farmer friends right now. It is one extra stress level on top of not having a crop.”

Delivery contracts and priced contracts aren’t just for farmers with a high risk tolerance.

Contracts have become the norm for farmers who want to deliver grain at harvest and receive money to pay bills in the fall, said Squair.

“The industry has gone to the point where you have to do some pre-pricing if you want money at harvest. The cash demand on a family farm is very high so you have to get in the queue. If you don’t pre-price, you are not going to be selling grain until December or January,” he said.

“In order to pay bills, you need to have some sort of forward pricing just to have a spot to deliver. The producers who are the most cash strapped would be on the higher end of that scale, more like 30 percent sold, and those are the farmers that are going to get beat up the most.

“Farmers don’t have much of an option. Good communication is the first option, but the grain company is saying they don’t want to talk to you right now. If they do talk to you they give such a high number to buy out at it is ridiculous.”

Squair worries inflexible positions by grain companies will permanently damage relations in the industry.

“Grain companies that work with producers this year, will negotiate with producers or defer some of the tonnage of payment will make out better in the long run because those customers will be very loyal to those companies that help them through a tough time.

“It is going to make every producer very gun shy to ever do a forward contract again and it is going to hurt the grain companies because they use these forward contracts to plan logistics and trains and vessels and make sure they have everything in place and the sales on the books to move grain in a timely manner,” said Squair.

Marlene Boersch of Mercantile Consulting Ventures said that during a recent producer meeting in Weyburn, discussions turned to the one-sided contracts by grain companies who shift all the risk to farms for everything from lack of grain to poor railway service.

“As a grower, I cannot influence how the rail contracts work out, how the railroad performs and it’s even worse when you talk about problems with ocean freight. You have no negotiating power. Elevator agents who used to have a little bit of leeway in how they serviced their customers, that is no longer the case. Usually head offices in Winnipeg or Calgary said these are the contracts; full stop.”

Farmers and industry associations need to develop a new contract template that is fair to grain companies and farmers, she said.

“The fact that you have no negotiation power from the farmer side of the contract and have a three-page list covering everything from railroad to God knows what, is no longer fair, in my view.”

Grower associations that take check-off money from farmers for pulse, oats, wheat, canola and barley all need to be advocating for contracts that are not tilted in favour of grain companies.

“They live off the farmers’ money. They charge a checkoff. In my mind, you represent the farmers and you must find a better way. You must represent the interests, but it doesn’t happen,” she said.

It’s a sentiment echoed by Roy. The once strong farmer voice has been fragmented into small commodity groups only advocating for their own crop and not with a unified voice for farmers.

“I think farmers are left as an individual entity. We don’t have much of a body to go to bat for us,” said Roy.

Jim Beusekom, president of Market Place Commodities, a Lethbridge grain company, said they have received calls from farmers wanting to cancel their contracts. Some farmers want to buy out of their contract in hopes of cashing in on higher prices than the original contract. Others simply don’t have the grain to fill their contract.

“How do you separate the two? For the most part we take their word for it that they don’t have the crop,” said Beusekom.

Letting a farmer out of a contract is not a simple switch. Beusekom bought the grain and has since sold the grain to his customers.

“I do think it is both our problems.”

Letting a farmer out of a contract doesn’t solve his problem of finding grain. If one farmer doesn’t have a crop, likely neither does his neighbour.

“The farmer has it sold and it’s our grain and we have it sold to someone else.

“Trust me, we are really all in it together.”

Beausekom said many farmers carry crop insurance that helps cover their lost crop and will pay the difference between the contracted price and the now higher price.

“They do have a number of risk management options. We don’t have crop insurance for our company.”

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