The grain industry is changing. With the move towards an open market for wheat and barley, there will now be a very different picture for farmers as they try to sell their product. John DePape was at Harvest Showdown over the weekend to discuss what the open market means.
DePape says there are several that need to be considered if a functional market is going to exist.
The first thing necessary is competitive returns. He says for a grain crop to make sense for farmers it needs to have a good return, but also have a return which is competitive with other grains. If such a crop isn't competitive, then it is likely that it won't go in the field, and there will be nobody growing it. He notes that wheat will consistently get a good return, as does malt barley. With barley though, he notes that there's a risk, since feed barley often has poor returns.
"When you think 60 per cent of barley is seeded to malt varieties and only 20 per cent of the crop is selected for malt, that's a strike against it," DePape suggests.
He notes that in spite of the good returns, wheat acres are down, while canola acres have tripled. He says that statistically, wheat has good returns, so it should have good acres. The reason is that it's difficult to get cash from wheat due to the way the marketing system works, DePape says, which makes it difficult to pay the bills. He says as a result, there hasn't been a good market for wheat.
"If we could cash flow wheat, we could get more acres."
The second factor is critical mass, which means the size of the market and the scope. DePape says that wheat has a large number of producers and buyers, so it has a good critical mass. For an example of a crop that didn't have a good critical mass, he cites Echinacia, which has limited numbers of buyers.
DePape believes that the wheat market will see improved critical mass with an open market, as more markets open up and more buyers begin to look for product.
Effective competition is the third factor. Competition drives out costs and keeps prices competitive. DePape notes that right now there are three large grain companies dominating the market, something he sees as being a negative. However, he believes that with an open market smaller companies will be able to get a foothold in the market.
"There's a diverse group out there. I've talked to a lot of smaller operations that have never dealt with wheat, and now they're dealing with wheat. Niche markets, specialty markets, we're going to have new entrants," he notes.
The next factor is effective and meaningful trade terms, DePape says. He says the current grading system isn't relevant in the rest of the world, and specifications being the quality other countries base things on. He believes trading on spec will allow more grains to be traded, as the specifications will allow grain that's graded poorly can meet specifications for certain applications that might get more money at the end. He uses the example of beer manufacturers in China, which uses a wider range of malt barley quality in order to get cheaper beers, rather than just the current malt grade. He says a bigger spread will allow farmers who don't hit the highest grade to still sell malt barley for a higher price than feed.
Market velocity is another factor, the ability to react to opportunities quickly. He believes that under an open market people will be able to do business more quickly and get grain sold.
The next factor is market participation. He says an open market allows for a more transparent system to see what's happening in the market, and that allows for better decisions to be made.
"It's price, it's volume, it's direction, it's movement, it's all these things," DePape says.
The ability to do risk mitigation is another factor. A futures market allows for some risk mitigation, and DePape believes pooling will still be relevant to farmers in the future, and voluntary pools will be a big factor in the market.
"Pooling is one of the best risk management tools out there," DePape says.
While it's still a contentious subject, he sees the coming open market as having some major advantages for the grain trade, on both sides.
