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XXIX - Responding To The Turmoil In Global Grain Markets

Updated: Jan 16

The core mission of our portal is to facilitate grain exports to overseas markets through direct-sales channels, from production sources to end-users. Most of our overseas exports, close to half of what we produce, go through bulk-channels. Based on long-established practices, producers have been conditioned to accept this as the most secure, if not the only way to export grains overseas. In many ways, they take it as a sort of celestial dictum, but we contend that there are much better ways.

In fact, direct-sales are prevalent in domestic and transborder grain-trades that make up the other half of what we produce. Corporate-purchases through direct-procurement channels set price-benchmarks for intermediaries to follow – grain companies that add value to supply-chains as well as opportunistic traders. This dynamic imposes the necessary discipline for grain markets to function competitively across North America, allowing producers to claim their fair share of trade-margins.

There is no reason not to strive for the same dynamic in overseas export-trades. We attribute the lack of direct-sales in this domain partly to the market power bulk-traders possess, but more importantly, to the information-gap between producers and overseas buyers. Our focus is on bridging this gap to facilitate direct-sales to overseas markets, which we believe could be done, diminishing the market power of bulk-trade interests without having to revert to any regulatory measures.

We have previously outlined a strategy to migrate our website, an information-portal, to a trade-platform. We started this with a series of farm and regional profiles that will be migrated to our new platform, Prairie Grain Mall, later this year with a trade-facilitation layer built into it. This core strategy has not changed, but now we are compelled to introduce an “interim-initiative” into our plans to respond to today’s global grain-market conditions and the market opportunities they present.

In view of these changing market conditions, we decided to modify our plans to try to create sales opportunities this year. We did not change anything that was already on our agenda but tightened up our plans to make them more results-oriented, before even launching our new platform later in the year. However, we are not betting on huge early results and will proceed with our core strategy regardless of what we achieve in the interim – thus, no fundamental change in strategy.

Here we start with a discussion on our global grain market outlook, which presents a promising window of opportunity. We then outline our efforts to kick-start direct trades, where we seek guidance and participation from producers. These trades will give rise to a volume-consolidation imperative, requiring more collaboration. Finally, we wrap up with the implications of this slight diversion from our original plans.

Grain-market outlook

Last year’s harvest was drought-stricken, not as bad as the drought in 2002 but still resulting in much lower volumes to export. For very different reasons, actual export sales to mid-January were also much below the same time the year before – wheat 45%, durum 35%, and canola 40% – surprising to many industry-watchers but not to us. This was a natural outcome of complacency, taking bulk grain export volumes for granted and not paying enough attention to the yield increases being achieved in emerging grain regions, particularly in the vast territory stretching from Eastern Europe to Central Asia, a long-neglected region we had coined the New Grain Belt.

If these trends had not reversed, we would have been in trouble, with large carry-over stocks into this year. At the time, we did not think there was much hope on the horizon to clear these stocks before this year’s harvest. But all that changed with the Russian invasion of Ukraine. Global markets went into turmoil, hiking up prices with even more increases on the horizon due to lower export volumes from Ukraine and Russia. Also, in fear of global grain-shortages, exaggerated in our view, a speculative hoarding-wave got underway. Thus, we entered a period of grain price inflation.

With extremely volatile weather conditions, drought in some areas while others still flooded, it is difficult to predict what this crop year is going to yield, but we expect that there will be more to export than last year, perhaps not as much as 2020 (51 MT) but higher than 2019 (41 MT). With the feared supply-shortfalls on the world stage, prices are almost certain to be favorable, thus it will be a good time to be exporting, as well as a good time to be introducing new export channels.

Looking out to the rest of this year and into next, the main beneficiaries of rising prices will be the custodians of our bulk-trades. They are sitting on unsold stocks from 2021-22 crop-year, and if the 2022-23 crop output is as we expect, there will be 45 MT more to export (after domestic consumption). Thus, grain-companies will have plenty to export into tight global markets at favorable prices, as both Ukrainian and Russian export volumes will be below normal levels – former due to lower output and clogged shipping channels, and latter due to trade sanctions or boycotts.

Whether these price rises will trickle down to producers or not, and in what share, are different matters. The grain companies that control bulk-trades are price takers from global-markets and will naturally realize higher revenues commensurate with rising global grain prices. On their carry-over stocks, which they would have paid last year’s prices, they will enjoy windfall profits. On this year’s crop-output, at least in theory, producers should receive higher prices commensurate with increases in global prices. Their actual share of export proceeds, however, will be dictated by market realities, not theory. In this regard, we should keep two factors in mind.

First, grain-companies hold more power over producers, derived from the control they have over the gateways to the bulk-system that producers are largely captive to in overseas exports – same argument we advance in postulating the margin-squeeze producers are under. The second factor to consider is differentials between export and domestic prices. In theory these should move in tandem, but in the short term there could be significant differentials. In North America we do not expect grain shortages of any kind, thus grain prices may lag global norms, at least for a while.

Our overseas exports are in a way a residual-category, surplus from what producers cannot sell into domestic and transborder markets. With the market power they hold, and in the absence of competing direct-sales channels, custodians of bulk-trades will have no reason to offer a penny more than producers can get from sales into North American markets. This in our opinion will motivate producers to explore alternative export channels outside bulk-trades; they can follow global price trends as well as anybody, with knowledge of what trickles down to their own accounts.

More than just global price increases at large, it was the anticipation of these price-differentials that motivated us to kick-start our trade-facilitation efforts at this juncture. We were going to wait for the introduction of our new platform, designed not just for promotional but also trade-facilitation purposes. But when global grain-markets were thrown into turmoil, we realized that there was a unique time-window to push for direct-sales channels that producers would be more motivated to try.

As we display in the exhibit below, our fundamental platform strategy has not changed – preparing individual-farm and regional-attribute profiles, migrating all these profiles to our new Prairie Grain Mall platform as virtual stores and pavilions, and adding a trade-facilitation layer to it. With the onset of the global grain-market turmoil, if not crisis, we realized we would miss a unique window when producers might be particularly motivated to try alternative export-channels. Thus, we introduced the “interim initiative”, not a diversion from our strategy, but an effort to jump-start trade-facilitation efforts with a focus on short-term results.

Our trade support role

It has been 50 years since all grains, but wheat and barley, were freed from CWB’s monopsony, and 10 years since wheat and barley as well. But direct-sales channels to overseas markets have not materialized in any serious way, leading many to conclude that this was not in the nature of grain-trades. Contrary to this conclusion, however, direct sales were happening routinely in domestic and transborder trades.

Along the way, there were efforts to kick-start new channels, not among producer ranks, but by opportunistic trading interests trying to buy cheap from the farm end and sell with a profit to end buyers. This was the antithesis of “direct-sales” meant to cut out intermediaries and leave higher margins behind for producers. They were efforts to compete with already established grain-companies, which of course were doomed to fail without proper handling, logistics, and trading channels in place.

These efforts were not widespread, but with enough unscrupulous traders among them to leave a bad track record. For slightly higher prices, producers had to wait for payment to release a container load or two. Even worse, when they were paid for those, larger volumes were left in their bins ready to ship many more container-loads that the trader had promised to purchase but never did. Naturally, these were not viable sales channels to ever consider as alternatives to contract-sales.

We do not have any trading intentions whatsoever, let alone opportunistically. We are here to facilitate grain trades, to connect end-buyers and producers so they may enter trade-contracts without middlemen, other than value-add service-providers needed to fulfill orders. We have no plans to impose any fees or commissions on the trades we facilitate, as buyers or sellers that connect on our platform can take their contract negotiations off-line to conclude. We will only get involved on a fee-for-service basis if needed and asked for due-diligence or contract-support purposes.

We are here to serve producer interests but not altruistically. Like any internet platform, we will have revenue sources to tap through advertising, promotions, or contract services, be it market-research, project-management, or other fee-for-services. To this end, we must grow our audience, producers who can see the higher-margin export prospects through direct-sales, and similarly buyers who can see the benefits in procuring the crops they need from production sources.

Accordingly, we are determined to not just grow our audience like a social-media stage but as a value-add platform in generating actual trades. However, direct-sales volumes are not going to grow organically one container load at a time. We must pursue a strategy of sustainable contract-sales to achieve large trade-volumes that benefit both buyers and sellers, and for this, we need to develop a viable framework.

This will fall into place once we launch our Prairie Grain Mall with an additional Trade-Facilitation layer, but our latest plan is to try to facilitate trades in advance of this launch, at least bring them to a “prospective” stage, helping the new platform gain quick traction with signs of early trades. This slight course-diversion is also motivated by the global market conditions that the Russian invasion of Ukraine gave rise to – creating turmoil but also highly favorable conditions for exporters, with rising prices in fear of supply shortages. In the next 6 to 8 months, we will attend to the following tasks while also pursuing our platform-development efforts:

Crop domains: At these early stages, we do not believe it is wise to cast the net too widely to all crop-domains where we see potential for direct-sales. We have some ideas as to where to focus our early efforts to get results, which we touch in the next section, but more important than our ideas are suggestions coming from producers. They know their soil-conditions and growth-conditions best to guide our efforts more wisely to achieve quick results, perhaps even in time for this year’s harvest.

Market research: Once these priorities are determined, we will formulate a market-research strategy to better understand end-market conditions to target prospective buyers. These early market-research efforts – industry-structure and supply-chain studies – will require external funding until we start generating internal sources. We will lean on producers to mobilize support behind these fund-raising efforts, aimed at all relevant departments, agencies, institutions, associations, or commissions.

Buyer reach: In each of the selected crop-domains, buyers will be identified through market-research, in all cases targeting industry leaders with known grain-import needs. We will also rely on country representatives that we have already selected to suggest targets. To clarify, we are trying to avoid intermediaries, but at these early stages we will need help to open doors, as marketing advisers, not agents with territorial rights – our policies in this regard will be guided by producer-interests.

Service channels: Once we gain visibility into market opportunities we target, we will start formulating service-channel plans – cleaning, grading, processing, storage, and most importantly container supply. As we have indicated in the past, we do have tentative plans in this regard, through our start-up logistics partner or third-parties. Specific service arrangements cannot be finalized until crop types, grades and volumes gain clarity, but we know the challenges and how to tackle them.

Supply-side initiatives