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XXXIV - Initiating Direct-Sales When Markets Are In Turmoil

Updated: Jan 16

After providing a long history of grain-trades that detailed how the Prairies became our primary grain producing region, our last two articles focused on two themes: how producers got trapped in bulk-systems, and how they could free themselves from that trap through containerization. In this article we come back to direct-sales and detail our plan to kick-start trade-facilitation efforts while grain markets are in turmoil, a period when we expect global prices to be above North American ones.

Higher global prices will benefit grain-companies, but with no reason or incentive to pay any more than prices producers get from domestic or US sales. Foreign buyers, on the other hand, will be prepared to pay global prices, making this short-term window an opportune time to be exploring overseas direct-sales prospects. Also, this is a time when producers are ridden with a whole range of anxieties about the state they are in, thus may welcome a chance to explore new export-channels.

Before we get into direct sales, however, we first want to touch on a few topics our regular followers may be familiar with from past articles, but not new ones. We start with a brief discussion on how our bulk-systems developed and why producers are still captive to them in exporting to overseas markets. Then, we draw comparisons between the Americas and Asia Pacific region, to show how the latter is shifting to containers in grain-trades. Also, we briefly discuss the resistance our own grain-companies and railways put up to containerization of grain-trades in self interest.

Against this background, we turn to our trade-facilitation efforts, which we label “interim” before our Prairie Grain Mall is introduced. We are embarking on these efforts to give producers a chance to capitalize on export opportunities presented by the current state of global grain-markets, highly volatile but with high prices. There may not be enough time to close contracts right away but at least producers will get to see what prospects there are in overseas markets through direct-sales channels.

In this vein, we provide a summary of the type of opportunities we are targeting in the Asia Pacific region, aimed at specific industry or market segments for specific types of crops – including wheat-durum, breakfast-cereals, feed-mixes, malting-barley, soybean, and canola. Our targets are leaders in their respective industry segments, known as reputable corporations, ones that we are familiar with. They all engage in direct-purchases and are experienced in receiving containerized deliveries.

We conclude this article with a plea to producers to participate in these early trade-facilitation efforts, guiding our targeting priorities with comments and suggestions. We outline the way we hope to receive their input through anonymous postings on our online Trade Forum. In this manner, producers can make crop-suggestions, and if they wish, also give us some idea of the crop-volumes they expect to have once they harvest – without revealing their identity, with no commitments or obligations. If they are interested, we are also open to confidential phone-calls or emails.

Anxieties facing most producers

Though often overlooked, producers face all sorts of challenges and uncertainties in growing crops, and deal with matters beyond their control. Weather conditions in production and market uncertainties in sales are just the obvious ones, and we must recognize how dramatic this past year has been for all producers in the Prairies:

  • You left behind a drought-stricken crop year, not as bad as the one a decade ago but still with some damage – some of you got hurt even more mainly due to future contract commitments, but the grain-economy at large survived.

  • As if that wasn’t enough, you faced huge price hikes in input prices – many were all stocked up already for next year, but everybody must face next year’s challenges with higher production costs and the anxieties they bring.

  • Early into 2022, war broke out between Russia and Ukraine, two major grain producers, together exporting double the volume we do – anxieties over supply shortages threw markets into a tailspin, initially with huge price hikes.

  • Seeding also turned out to be quite turbulent, some areas were flooded while others too dry to seed – it was not free of anxiety, but most of you got over it, and after facing considerable delays, are now hoping for quick growth.

  • Now you are watching crops grow, with some trepidations as usual, given strange weather patterns, but it looks like prospects are not bad – certainly better than last year, and for some of you, it may turn out a rather good year.

  • Aside from yield uncertainties, you do not know what to make of volatile prices, spiking earlier in the year but now crashing – despite all the expert-pronouncements, we do not know if, and when or where all this will settle.

Aside from spraying and all the other chores you need to attend to in the coming months, and the weather to worry about – as if that were not enough on its own – you must also be preoccupied with sales prospects. Price differentials across crop varieties are inexplicable, and daily fluctuations feel almost random, while self-proclaimed market experts are passing judgment on war-effects, though some do not even know what crops warring factions grow, or where and how they export.

Still, barring any disasters like another drought, probably most of you know roughly what you are going to have in stock at the end of the harvest. For security reasons or to cover immediate cash needs, you have probably presold some of your crop through advance-contracts (hopefully not as much as last year) and depending on your trading knowledge and risk appetite you may have also sold options – be it “calls” or “puts”, obligations you must take into consideration when you harvest.

In a few months hopefully you are going to have much more to sell. You know what direct-sales possibilities are, in your vicinity or elsewhere in Canada or across the border – flour-mills if you are growing wheat, crushers if canola, or cereal-makers if oats, to give a few examples. You might have committed some of your crop in advance to these direct-buyers, and probably have some sense of what more you can sell. Also, you know that all the grain-companies around you are going to knock on your door to buy more to consolidate and trade in bulk on their own account.

There is also another option, direct-sales to overseas buyers, which we firmly believe you should give some consideration to, as they are likely to yield higher margins than the grain-companies to which you are accustomed to selling. Our mission is to facilitate the development of these direct-sales channels, as they currently are very limited if existing at all. Though our platform is not quite ready to go into high gear in this regard, this year’s war-triggered turmoil in global grain-markets enticed us to explore an interim strategy to kick-start the process earlier than we had planned.

In a recent article we advanced the hypothesis that this year North American grain-prices may lag world-prices, mainly due to fears of shortages globally but with steady supply in North America. Grain companies that trade in bulk will benefit from higher export prices but are unlikely to offer you much more than what you would get from domestic or US sales. Overseas buyers would be motivated to procure directly, offering you higher prices while they themselves realize savings. But can these types of channels be activated quickly to respond to the current market conditions?

To be honest about it, we do not know whether we can put any concrete export opportunities in front of you for this year’s crops. But given the prevailing market conditions, we decided it was worth an effort. As our regular followers know, our online platform is not yet in a mature enough state to properly promote the virtues of the Prairie region and attract credible corporate buyers like the ones you have across North America. But the extra effort required for this diversion is modest, and we thought it would help the launch of the full-blown platform we have in mind later this year (or early next) and could potentially provide immediate value to you.

Part of our motivation is to capitalize on this window of opportunity presented by the turmoil in global grain markets, higher prices in fear of supply shortages. The other part is to alleviate the anxieties we sense you feel in these uncertain times. If these prospects materialize this year, you will be comforted by the opening of new direct-sales channels that we are certain would provide you with higher margins.

If not, we will still benefit from having reached out to end-markets and would pave the way to attracting reputable buyers to our new platform. Also, this will give you a chance to be exposed to these new channels as well as foreign buyers and see how you could benefit from them. This will pave the way to our mission of bringing you higher-margins now, and in time open diversification options to higher-value crops.

Captivity to bulk-trades revisited

As we keep reminding our readers, our overseas grain-exports are highly captive to bulk-trades, as much as 85% of our exports through the west coast are in bulk. This is detrimental to producer interests: squeezing margins from current sales and an obstacle to value-driven diversification in the long run. The roots of the captivity of our overseas exports to bulk-trades are historical but perpetuated by recent trends:

  • Historically, the only means of transporting grains was a primitive form of break-bulk – bagging grains, moving by horse-drawn carriages to rail heads, hauling in box cars to export-ports, and shipping to markets by vessels.

  • In the early 20th century, with the introduction of motor-trucks and grain-elevators, consolidation and direct box-car loadings became possible, moving to ports where the vessels of the time could now take grain into bulk-bins.

  • Market havoc of the early 1930s forced our hand into the single-desk system that took charge of advancing the bulk-system – larger elevators, unit-trains of hopper-cars, coastal terminals, and a new generation of bulk-vessels.

  • Through market liberalization efforts, and the abolition of CWB, assets relating to grain-trades and consolidation were privatized, but the bulk-system stayed intact in the hands of a handful of private grain-companies.

  • In the absence of other channels, staple-crop exports to overseas markets remained captive to bulk-trades, with only pulse and other specialty crops being containerized, as they were not suitable to consolidation in bulk.

In the post-WW2 era, with all our grain-sales in the hands of CWB, wheat had been our primary export crop (as it had been going back a century more) with relatively modest volumes of barley in the mix. With CWB’s single-desk powers being curtailed to wheat and barley in the 1970s, canola became another major export crop. Wheat export volumes held their own, but their share of the total declined to about half, while canola exports increased to as much as a quarter. These two crops, together with barley and others handled in bulk, account for roughly 85% of our grain exports.

Though we have become a prime source of pulses that are mostly containerized, on the world stage we are still mainly known as a source of bulk grain-exports, not a place where buyers could reach out to procure the specific types or grades of grains in quantities they need. This is how we promote ourselves in overseas markets; this is how we did business going back to CWB, our single-desk grain-seller, but continue to this day, only now with the market in the hands of private grain-traders. We look at grains as commodities to consolidate, and ship to exports markets in bulk to be received by our trading counterparts to distribute through wholesale channels.

This has always been evident, in fact reinforced, by the promotional material grain companies used or displayed on their websites, with images of giant grain terminals for consolidation, long unit trains carrying grains, huge port-side terminals, and bulk-vessels moving grains to end-markets. Except for pulses and specialty crops, you would not come across any mention of containers or direct deliveries to end-users – as we will get into next, these are the prevalent trends in grain-trades worldwide.

You would be hard pressed to find any reference to the crop varieties we grow and could export, advanced farms where crops are grown with latest technology and agronomy in action, storage bins to fulfill orders from farm-gates, grain-handling or logistics services, quality assurance or identity preservation, let alone any desire on the part of producers to sell direct and/or engage in grow-to-order contracts. Thus, we are not known for what we really are, a premier source of a huge variety of high-quality crops end-users can reach out to procure directly from production sources.

Global grain-trades have changed greatly in recent years and continue to change. Grain movements are highly containerized across EU, and so are exports from East Europe and Central Asia to Asia Pacific markets, with receivers enjoying the distribution and inventory cost savings. If exporters fail to reach out to markets, end-users engage to procure on their own account from grain sources. We, on the other hand, are still stuck in a bulk-warp that perhaps was the only way of handling grains until intermodal-systems developed to pave the way to containerization.

Our grain companies have the knowledge and the capacity to shift more attention to containerized exports, but not the willingness to move in that direction. They are heavily invested in bulk-assets and naturally are not willing to divert volume away from those assets. Moreover, while they have a lock on bulk-systems, containerized trades are more contestable, where they can easily be cut out of those trades by direct-sales – buyers extending their reach or producers getting more active in sales.

Our mission is to do exactly what grain companies are not willing to do, and we are confident the platform we are going to introduce later this year, with a virtual grain-mall and a trade-forum, will attract droves of corporate buyers from the regions we are targeting. The big question is whether we can attract overseas buyers sooner, as early as for this year’s harvest, while global markets are still in turmoil, with world prices above North America and an appetite to buy from the Asia Pacific region.

As we will get into below, however, we will be extremely cautious in our reach-out efforts to avoid opportunistic trade interests for the sake of quick results. We will target specific market segments like wheat-flour, breakfast-cereals, feed-mixes, soy-products, and malting-barley. To avoid undue trade-risks, we will limit our efforts to industry leaders that are reputable corporate buyers. If successful, these early scouting efforts should pave the road to much larger volumes next year and beyond.