VII - Further Thoughts on Specialization: Who can Participate?

Updated: Jan 29

Our last article tried to tackle some of the challenges posed by the specialization imperative that we are advocating to free producers from captivity to bulk-trades. It was a general piece, focusing on the process mainly from a risk-reward perspective. It may not have answered all the questions producers have on the paradigm-shift we are promoting, but we have plenty more material coming on the subject that hopefully will provide a more comprehensive thesis on the challenges ahead.

In the meantime, another topic came up and we thought it would be prudent to address it before moving on with our agenda. On the surface it may sound like the whole process of diversifying to specialty crop grades or varieties may be more suitable, if not only applicable, to very large farms. There is an element of truth to this proposition, so we wanted to address it here with some ideas on how smaller farms could tackle the same challenge, incrementally without taking on undue risk.

This issue came up in some of our social-media chats, with a producer commenting that their farm was far too small to be contemplating all these diversification or specialization initiatives. In a similar vein, another producer commented that they were content with sticking to conventional crops, particularly in view of the fact that they were not carrying any debt (a factor we emphasize in our margin-squeeze argument), thus posing the question of why they should consider changing course.

Both points are valid and deserve to be debated, but neither would lead to the conclusion that our audience is limited to mega-farms, or that if you are not suffering you don’t have to change. The latter is easier to address: as we discussed before, there are risks looming over our bulk-exports. You may be content with growing wheat and/or barley today, and selling into bulk-trades, but still, the future is worrisome; the world is changing, and this comfort may not last very long.

As we said before, the pressure to change comes from a pressing necessity, not simply the desire for more profit. The global market outlook already confirms our fears over bulk-export prospects, particularly with the emergence of the New Grain Belt, a vast territory from Caucasia to Central Asia. The same had been said about other emerging regions, but this is different for good reason: better conditions, and know-how coming from China, a country already enjoying similar crop yields to us.

We do not want to bring this debate to a closure here but we thought we would add a few more pages to our specialization-script -- we encourage more thoughts and comments from you on our portal or other social-media accounts. Here we address the issue of “scale”, favouring larger farms, and but also give examples of how smaller farms can also take initiatives to diversify. We also show how sales orders can be fulfilled by the participation of multiple producers, large and small alike.

Grain-economy dilemma revisited

We do not want to dwell on the same issues we discussed already, but let us start with a recap, why we embarked on this initiative in the first place. Following a rapid liberalization course, the grain-economy has done quite well, at least on the surface, achieving significant yield-increases and export-growth. But we still remain highly captive to bulk-trades, as much as 85% of our exports from the West Coast. Pulse-trades added considerable value but still account for a small share of our exports.

The main force propelling the grain-economy forward came from the grass-roots, producers -- yield increases driven by consolidation and advancement. All this required considerable investment on the part of producers, be it in land, machines, systems or bins. Revenues were rising, but not commensurate with investment, increasing the debt-load on producers, still manageable for many but worrisome for others -- some were happy to retire, while others were forced out under duress.

The assets that make up the grain-economy are not limited to farms; there are the bulk-systems that handle crops to export destinations. These assets (owned by CWB and wheat-pools) were privatized, falling into the hands of a few grain companies with considerable market-power over bulk-trades, while producers were still captive to those trades. Bulk-exports fetch relatively low prices in world markets, while producers’ share of export-proceeds is limited due to lack of competitive channels.

Our basic fear is that bulk-grain prices are going to come under increasing pressure due to other supply sources expanding their production, particularly low-coast ones like the New Grain Belt we cited. Thus, producer-margins, already narrow in today’s market environment are going to be squeezed further, perhaps even jeopardizing the viability of growing staple-crops that are exported through bulk-channels. The only way for producers to increase their margins is shifting to higher-value crops.

Then, why are producers not switching to those crops? Most high-value, or loosely defined as, specialty-crops are bought directly by end-users in small quantities, and have to be shipped to final destinations in containers with their identity-preserved. But neither those direct-sales nor container-logistics channels are easily available in Western Canada, holding producers back from diversifying to higher-value crops.

The importance of scale factor

Traditionally farm sizes were quite uniform across the Prairies, and compared to today’s norms, most farms were quite small, typically a couple of thousand acres. There was a strong desire to uphold family-farming traditions, and resist corporate farming taking hold. Still, with market liberalization, considerable consolidation has taken place across the region. Now it is estimated that larger than 20,000 acre farms (more than 2,500 of them) account for as much as 40% of farm-land in Saskatchewan.

Strictly speaking there are limited scale-economies in farming -- theoretically a 1000-acre plot can achieve the same yields as a 10,000-acre one. But with rapid advances in technology, larger farms started to gain considerable advantage. They could afford to buy the latest machines more easily, and benefit from all the advanced devices that came with them (sensing, spreading, etc.). Even more importantly, they could utilize equipment more effectively to justify more investment in technology.

The key factor that has propelled the farm-economy forward in recent decades was crop-yield increases, thereby achieving significant export-growth. Behind the yield increases were scientific and technological advances. The advantages larger farms had in purchasing and utilizing the latest machinery gave an impetus to consolidation. There were plenty of farmers ready to cash in on their land and retire, thus plenty of land to buy, and even rent to farm larger tracks of land, a growing trend we observe.

It could also be argued that larger farms can sectionalize more effectively, and diversify to multiple crops to increase their revenues, as many producers are already doing across crop varieties that are sold to bulk-trades (wheat, barley and canola), as well as more lucrative ones like pulses. These advantages could also extend to the new era of specialization we are trying to facilitate, to specific grades of staple-crops or new crop varieties, sold through direct-channels and shipped in containers.

There is no reliable empirical evidence to verify or refute the bounds of scale-effects in farming, other than a general belief that larger-is-better; all we can observe is that consolidation still continues. But there are plenty of sub-5000 acre farms doing just as well and diversifying as effectively as larger than 20,000-acre ones. For this, we turn to smaller farms, and what they could be considering doing to stay competitive.

Opportunities for smaller producers

We acknowledge that size matters, particularly in making advanced technology more affordable, but there are no minimum viability thresholds for considering the type of specialization initiatives we are proposing. If you are profitable, even barely viable relying on traditional crops that you sell into bulk-channels, you should be weighing your options to shift at least part of your output to higher value crops, if for no other reason than protecting yourself against the risks bulk-exports face in global markets.

If you are farming a couple thousand acres of land that you rotate between wheat, canola and pulses, you are already doing this with the latter, higher-value crops even in the state they are in -- captive to a few grain companies with limited direct export-channels. As more attractive offers start coming from new channels that you can be confident of getting paid from, you can consider shifting more land to pulses, in view of lower margins from wheat and canola that may be squeezed even further in time.

Even if you remained more conventional by sticking to wheat and/or barley, and are selling into traditional bulk-channels, it would be worth looking into alternative channels. There are many importers around the world -- in your case flour-mills or craft-brewers -- sourcing these crops in container-lots. Even if the particular grades you grow are not in demand, you could consider shifting part of your output to types that direct buyers are looking to procure as long as they can be containerized.

Perhaps the examples we are giving here are overly simplistic or too general to guide any cropping decision, but the moral of the story is simple: there are specialization opportunities for everybody, regardless of size, as long as they have a viable starting base. Even if you are among the smallest of today’s Prairie farms, there are options to consider, like organic-of-anything, to sell across North America, even overseas as grain-imports are becoming within everybody’s reach around the world in containers.

Thus, it is not farm-size, but your production-capacity and the trade-risks that come with direct-sales you should consider. We acknowledge these risks and devote a lot of effort to risk management and mitigation; there are risk-reward trade-offs in all trades, including the ones you may be accustomed to. Also, we are not asking you to rush into specialization, but watch for new, more reliable export-channels to emerge.

Volume considerations in direct-sales

Let us start with “mega-farms” that industry observers (or our followers) consider to be prime candidates to participate in direct-trades. If we take a 20,000-30,000 acre farm as an example, its annual output is going to be the equivalent of 1000-1500 containers a year, or 20-30 a week. A prudent producer, in this case large farming-enterprise, is not going to tie its entire output to a single buyer, or even a group of buyers -- its volume on any one trade is not going to exceed 5-10 containers a week.

Examples we gave in our previous article, based on our own market-development efforts from a few years ago, involved three trades requiring roughly 600-750 container-shipments a week, to multiple destinations. Even if we take much smaller trades, let us say one tenth the weekly volume, we would be dealing with about 60-75 container-loads a week, requiring 10 or more of our largest farming-enterprises to fulfil. Thus, direct-sales are going to involve consolidation from multiple sources.

Our trade-facilitation aim is to identify credible buyers and ensure that what they need can be sourced from our region, to the specifications they stipulate. After we carry out the necessary due diligence on the buyer, we would ask them to issue a standing-order. Then a consolidation-agent will get involved -- buyer-representative, local export-agent, or an established grain-company -- to initiate the sourcing efforts from Prairie producers. Then, negotiations will get underway to finalize the contract.

Let us say a 50,000 T per year contract materialized and half of it is taken up by 5 very large producers committing about a fifth of their output for the coming crop-year. The other half, still 25,000 T, can be shared by 50 smaller producers, each taking up 1% of the contract-volume but still committing a fifth of their output, 500 T/year -- 25 containers/year. This is what we would regard a steady export-flow, involving crops as ordinary as grades of wheat/durum sold to a major flour-miller.

There could be plenty of such contracts for grades of wheat or barley for milling or malting, as well as a much broader range of coarse-grains or oilseeds for custom cereal or feed mixes we cited earlier, not to mention pulses or other crop varieties. Hundred such contracts would increase our containerized grain exports from the West Coast by 150%, for a multitude of producers of all sizes to participate in.

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Further Thoughts on Specialization
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