What is a good price?

[rain]

I have been out of the loop for awhile, but I have a question I hope someone can answer for me. What is a good grain price. I have been in the grain business for 9 years, and 15 years before that in the livestock feed manufacturing business.

I keep hearing prices are to low, but their is still to many people who still wait till the need to cover bills in order to sell anything. We cut back on canola seeding last spring because conditions where far from ideal, but we still took some new crop basis. This year we may not seed a bushel of canola even if the bid was $10.00(if we do seed any we most likely will not even book basis this year). We make our decisions as business decisions and there are still way to many farmers and not enough business people in this industry.

Unfortunately the CWB is not going anywhere right now and beleive it or not the CWB, WCE, CBOT and the USDA tells you very clearly what products to seed, and more importantly, what products not to seed.

How many producers have tried to get a new crop feed wheat price yet, how many producers are holding barley to get $4.00, how many producers still have canola 3-5 year old on the farm.

My experience is there are more producers afraid of missing the highs than realizing lower prices.

So someone tell me what is a good price for wheat barley and canola. Is it 1%,10% or 20% net or gross profit. Is it holding the dog for better prices one month or one year down the road.

Some areas of the province did see good yields and we are talking $200-$300 gross per acre for feed barley. I have guys who got 25 bushels per acre of feed barley and they will see $175 gross.

I don't beleive there is anything like a good grain price, it is either profitable or not and risk to reward should be the determining factor in what is seeded.

So what is a good grain price.

[ianben]

A good price in my opinion would be a more stable price.

It would help when making those real business decisions and allow a meaningful plan to be drawn up with confidence that it could be implemented.

I believe that a stable price would help everyone involved with our products both buyers and suppliers.

What are the costs involved in buyers price risk management or suppliers trying to meet our erratic demands?

If farmers try to relate selling price to yearly cost of production we must have huge volatillity as your own figures show. This is part of the problem today I think the guy with the lowest cost of production in the world this year is the price we all recieve.

This is not a good price except for him, next year it might be you, and the year after me but if we only make money one year in three none of us will survive.

There is no way to put a % profit on any one year when yield varies so much,but a better way to average things out must be possible

Perhaps if we look at it in money terms.

Some years we win the lottery sometimes we loose our shirt.

The difference is with money we have the confidence to bank the good times and borrow in the bad because the $/£ is fairly stable.

How can we acheive this with grain?

[TOM4CWB]

Rain,

Both Soybeans and Corn are at approx. the same price as last year right now, yet barley and canola are both about 20-30% higher than last year.

This drought premium obviously will not remain if it rains this spring.

SO with historically profitable prices vs our neighbours to the south, what would be prudent?

Do you really expect no yeild at all from what you will grow this spring?

Freezing up can be very expensive.

What about buying back soyoil calls after selling canola, or buying back corn calls after selling feed barley, for next fall?

[cowman]

We have to realize that feed barley and to a lesser extent feed wheat have only one real market here in western Canada...the cattle and hog feed markets. Now the Cwb might sell a wee bit to the Arabs to feed their camels but the domestic market is where most of it must go. The death of the Crow took away a lot of export options. Therefore the fact is these feeds must be competitive with American feed grains. Otherwise cattle and pigs will not be fed here but in the U.S., because that is where the meat is going. Now we all know that barley is a good feed but look how fast feedlot alley brought in the corn when the price got too high. Also look at how many feeder calves went south.
Rain: I think you made a little mistake when you said $175 gross on 25 bu./acre. I believe$2.50/bu for barley is too cheap but $3-3.20 is a pretty decent price. I think there is a fair buck in it then. Of course if you have a low yield it wouldn't matter if it was $4 or even more!

[TOM4CWB]

Charlie,

At a marketing seminar yesterday in Westlock, we were told that Canola Oil has gone from a 2cent discount to soyoil in the last couple years to where it is trading at a 4cent premium to soyoil.

This is because, I would assume that Canola oil was being substituted into palm oil useage, where today only consumers that are discriminating and require only canola oil are buying it at the higher price vs soyoil.

The same has happened with feed barley in western Canada. We have gone away from the traditional barley/corn spreads to where barley is worth more than corn because of the short supply.

What I don't understand is that supposedly the CWB has been developing a specialty market for our CWRS wheat, yet we don't seem to be getting a premium to US HRS wheat, even when we have a short crop, why?

Also USITC records show that we have gone from a carryover of 4mmt at the end of July 96 to 8mmt Spring Wheat carryover at July 31 2001. Yet somehow goverment carryover stats we were shown yesterday did not indicate this was the case, but that our carryovers have been relatively constant.

What really has happened to Spring Wheat carryovers over the past 5 years in Canada?

Why in our other non CWB crops, are we in western Canada, at premiums to other competing crops that could be substituted, yet the CWB has not, for some reason, acheived these same premiums on malt barley and CWRS/CPS/CWES milling wheats.

Why when the CWB has a monopoly have they failed to acheive a fair market value vs our crops like Oats, Peas, Feed Barley, Canola, Flax, Cannary Seed, Beans, etc.???!!!

[charliep]

Tom4 CWB

You will have to let me know what other tidbits Mike J. shared at Westlock.

A comment on canola oil is that there are 3 pretty distinct markets for it.

The first is a North American/higher valued world market where you can price canola at a premium based on its quality characturistics (it is a healthy oil we can be proud of).

The second is North American market that is priced in competition with US soybean oil. You see this vegoil on the grocery store self with the label may contain - you know the oil that is in that jug is the cheapest North American that meets our health standards. A lot of this type of oil goes into the North American food processing and restraunts trade.

The third market is the world market where palm oil is king and price means a lot more than health characturistics (these areas of the world are more concerns with getting enough calories/energy versus health issues).

We have about 4 MMT of crush (actually more but this a nice round number).

At recent average annual crush of 3 MMT, western Canada sells mainly into categories 1 and 2 with a small portion into 3 (still able to demand some premium relative to world markets based on quality).

At 2 to 2.5 MMT (likely situation this year), a higher percentage of the canola oil gets sold into category 1 (places where canola quality characturistics are valued and priced accordingly). A note that needs to be highlighted is that canola/****ssed (as well as sunflower) production is down world wide and this is also helping with the premiums on canola oil over others. A note from this however is that the domestic industry is still only running at less than 50 to 60 % capacity and 75% of the level of recent years. Looking at the other side of the coin, vegoil jugs at the local super market that say may contain likely have less canola oil in them.

If we pushed domestic canola crush higher such that more product had to be sold off shore at palm oil prices, then canola oil would likely move to a larger discount to other world vegoils. This has been the situation over the past year with soybean oil where meal has been driving crush and oil has been a by product. Vegoil is a product that goes rancid so you can't store it forever (sell it or smell it).

Hopefully this contributes to the process of discussing markets and how prices can be differentiated. I will contribute to talking about market structure and the CWB in another thread.

[melvill]

What's a good price for grain? I believe it's not as tough to figure out as we think. A good price for grain is a price that is profitable on an individual farm. Now granted, a profitable price isn't always available but figuring out what would be a profitable price gives farm marketers a starting point. Here's why I think that.

My Dad ran a farm and a hardware store. In the store he didn't waste much brain power reflecting on what would be as high a price as the market would bare when he put a retail price on his products. He knew exactly what his cost of production (wholesale cost freight overhead) was on nearly every item in the store. He priced each item in relation to his cost of production. He knew what was a profitable price and what wasn't. How many farm managers know what their cost of production is for every item on the farm? My experience tell me, not very many.

[TOM4CWB]

Lee,

With dry weather, how can we know our cost of production to hedge next years crop?

We don't even know quality or quantity yet, so how do we take advantage of higher hedge prices today?

If dryness remains, there is added basis risk, that cannot be insured against this change.

Crop Insurance does not provide coverage for what it would cost to replace bu/ac that are lost, only what they figured in Dec 2001 what it might be worth, without risking too much crop insurance reserves!

I wish crop insurance would step up to the plate and pay fair market value, say Oct. 1st 2002, then we could know our cost of production!

As it is, how can you compare our farm production costs with your dads store items?

[melvill]

Good morning tom4cwb. My heavens you added that post late at night (or early in the morning). I'll try to answer your post paragraph by paragraph but I will say that my bias right up front is that the more business-like we approach managing our farms the more successful we will be. I've come to that conclusion from watching people who farmed and who ran businesses at the same time.

Paragraph 1: Certainly there is no guarantee of yield in any year never mind next year where soil moisture conditions are so poor. But can't farm ers calculate a cost of production based on 5-year average yield, poor yield and a good yield. That's the starting point.

Paragraph 2: Same thought as paragraph 1. Quality risk is the other part of production risk but we still have to start somewhere.

Paragraph 3: Basis risk is part of price risk. It can't be insured against but it can be managed in most instances (except in CWB crops).

Paragraph 5: A crop insurance price is closer to a floor price. In my opinion, it's not a cost of production. A COP is each farm's cost of producing a tonne of canola, 100 pounds of calf, a pound of grass seed and so on.

Paragraph 6: When my Dad priced items in the store he had to use his COP to start somewhere. When he priced an item he didn't know how many he was going to sell or even if he was going to sell any at all. If he didn't sell any at all, he would have to reduce the price to move the item, just like farmers do. He might have to reduce the price to below his COP to move the last ones but at least he knew what he was dealing with. How can a business, any business including farming, operate in any other way? That's how I compare a hardware store to a farm.

A good price for anything is different for every farm depending on what each farm's COP is.

[TOM4CWB]

Lee,

I guess the point I was making was that by hedging 2002 production, I could be adding significant cost increases to my Cost of Production/bu.

If I have a small crop, obviously my Cost of Production, will be mich more, because less bu/ac for the same fixed cost base yeilds higher cost/bu.

The hedged price locked in then compounds the already short revenue caused by the drought/short crop senerio.

RISK MANAGEMENT IS NOT SUPPOSED TO CREATE MORE RISK THAN IT COVERS TO BEGIN WITH (SOME WOULD ARGUE IN OUR MINDS BUT NOT ON AVERAGE IN REALITY).

IF A SPECIFIC DECISION CREATES MORE RISK THAN IT WAS DESIGNED TO COUNTERACT, THEN I WOULD CALL IT PURE SPECULATION.

THIS IS WHY THE CWB IS ATTRACTIVE TO MANY, BECAUSE AVERAGE IS BETTER THAN THE RISK OF BELOW AVERAGE DECISION MAKING IN THEIR MINDS.

BUT IN THE WORLD TODAY, WILL AVERAGE PERFORMANCE CREATE PROSPEROUS COMMUNITIES, AND CONVINCE THE my NEXT GENERATION THAT THEY SHOULD BE FARMERS?

IS AN AVERAGE PRICE A GOOD PRICE?

[charliep]

You will have to forgive my curling examples but they relate to how I would approach pricing this spring.

When you are a skip calling a shot for lead rocks, you have three alternatives.

Throw up a centre line guard (you likely are throwing lead rocks and want to set up a situation where you can at least slip a rock in behind the guard to steal a point).

Try to place two outside guards (you have the hammer and want to position yourself to take two points).

Put lead rocks in the house and let the other team shoot at them (you are in a strong position playing against a weaker team).

Your strategies on the grain/oilseed marketing side could be as follows.

Do some forward pricing based on your cashflow/profit requirments keeping in mind yield potential. This to me is like throwing up a centre line guard in that it provides the base to start your marketing plan in a year when there is at least some price downside potential.

If you are somewhat optimistic about prices but still want to do some spring pricing as a part of your markeing plan based on cashflow needs/profit signals, look at alternatives for establishing a minimum price/keep the upside open - these include grain company minimum price contracts, buying puts (guaranteed futures price) or forward price some of expected production/buy calls (use as a lottery ticket in case prices rally this summer).

If you are in a strong financial situation and are optimistic about prices, do nothing.

As a note, I like the idea of minimum price contracts in the coming spring but I will leave this discussion for others.

The point of this is that you are trying to set things up early in the game/cropping season to take advantage of opportunities/manage risk later in the game/year. You still have six rocks to throw after lead rocks/another 12 to 18 months to market grain so there is still lots of time to do some other things.

How do others think of their marketing strategies?

[ianben]

Lee I would bet your dad also did a bit of market research in his store.

No point priceing way below the opposition if you get a good deal/low cost of production.

No point trying to sell at $10 if the same product can be bought for $9 across the street.

Is it just as important to know the other guys cost of production when deciding on a good price.

This is an area I find very difficult to find facts yet I am sure it is the way most products are priced today.

We all try to produce the highest yeild for the least cost already so knowing the exact figure does not help that much in my opinion.

We still need to maximise the profit in the good years to see us through the bad.

Could advisers like you give us a recomended price and ideas on competitors cost of production.

A while back Tom and I agreed $7/8/bu would be a good price for canola.
I am sure most farmers would be happy at this level too.

Would imports flood in from other countries or would they send less having payed their debts sooner?

I am sure the cost of Roundup has more relation to what Monsanto thinks I can afford to pay than their cost of production.

I am sure the price of Wendys A&W and Burgerking is more closly linked to the price of a BigMac than their individual costs of production.

Lets stop argueing and learn about marketing.

There are other ways apart from futures and our own costs.

[Steve]

The right price for grain has to be calculated on a average crop.

I can’t understand why some farmers say they can’t calculate their input cost early in the year and on the other hand say they have all these management skills. ( this is your formula ( !-&%*$@#? )

Charliep: your last comments are excellent and people should read them more than once, because all the marketing options are there for next year sales.

This is one way to establish a reasonable price for a bushel of grain. Farmers have a tendency to throw everything in one pile, and then try to dig out solutions for their problems that are not in that mess.

Start by listing your last years input costs for: fertilizer, seed, chemicals, fuel and bank loan charges ( if you need a loan for operating )also check your suppliers for this years prices for the same products. Now use your farmer management skills to come up with a pretty reasonable cost estimate for this year.

Look up your fixed cost and add it to your input cost. ( include land rent, land taxes, crop insurance and labor ) Make sure you add your labor at a realistic rate. ( no coffee shop hours )

Use a five years average yield for each crop to calculate the cost per bushel or tonne, and add 10% profit to arrive at the sale price of grain.

If the yield goes up, your profit is better or you can sell for less to compete in the marketplace.

If the yield goes down then the crop insurance plan should kick in to pay you the difference.

All countries will have a different input cost and this is where insurance and/or subsidies are activated.

Now you have to take a good look at your operation and determine if the land base, equipment, people to support and lifestyle is in the right ratio.

The price should be compared with other farmers in your area. This should tell you three things: Your grain prices are too high, too low and if they are not average, you better take another look at your operation.

The biggest problem will be to get farmers to cooperate and exchange price values.

Coffee shop BS prices are not reliable.

[TOM4CWB]

Sorry Steve,

I guess I am not good at explaining myself!

Risk, how do I cover off risk on a high risk production season, like a year like 2002?

First tool this early is to know crop insurable values.

Example:

I hedged $290/t Dec 2000 Canola for Sept 2001 delivery.

Crop Insurance value for 2001 crop was $290/t (variable rate July price).

If I was short for my hedge, the buy-back price in Sept of 2001 was about $325/t.

For every tonne short below crop insurance coverage(80% coverage is around 65% of average normal yeild), I not only loose the $290/t, but an additional $35/t to buy Canola from someone to fill the hedged priced contract!

In this senerio I loose my crop insurance coverage plus $35/t to pay to repurchase grain for the hedge contract!

Now I can buy a Nov. 2002 $330 Call back at $25/t to cover off my risk, but at an increased cost of production equal to;

35bu/ac divided into $25/t equals $20/ac additional added cost for my average normal 35bu/ac crop!

Now, what were the chances of Canola dropping $20/t below $310?

Now that Canola is $334, this reward is slightly better, but is $314/t enough?

It still doesn't reach the $7.00- 8.00/bu, so if I am not willing to take the risk on myself and self insure, I would say we are still at least $10/t off a serious hedge program start for 2002 fall Canola.

Does this make sense?

[Steve]

Tom4cwb

Your market procedure comments I understand very clearly, but slow down because it is to early to start marketing your 2002 crop, ( in a possible dry year ) and like Charliep said maybe do nothing. The weather rumors will kick the market around for a while, but if you’re a gambler then go for it. ( not good management )

Regards Steve.