For farm advocates, agribusiness consolidation has brought with
it a host of evils, none more precious than the loss of family farm
independence, knocked back on its heels by a one-two punch of an
eroding cash market and an increase in forward contracting.
As firms and plants have consolidated, left behind are fewer commodity
buyers in the cash market, on which small producers still depend
heavily. Fewer buyers mean less competition in the cash market and,
by extension, lower prices.
Compounding this, consolidation has meant that remaining plants
have become bigger (in some cases, much bigger) to capture economies
of scale. To guarantee a steady supply of high-quality inputs, processing
firms have turned to forward contracts-buy/sell agreements for future
crops or livestock-to keep processing plants operating at high capacity
and efficiency. Farmers who continue to sell in cash markets argue
that these captive markets relegate them to stopgap suppliers who
bear the brunt of swings in supply and demand.
More U.S. farmers are signing forward contracts to shield themselves
from price risk in a herky-jerky market. But many remain skeptical.
While contracts can help with short-term cash flow, they do little
to help farmers get ahead in the long run, according to Paul Strandberg
of the Minnesota Department of Agriculture.
"In terms of capturing opportunities for major profits, [contracts]
definitely cut the tops off the margins" for farmers, Strandberg
said. As a result, contracted farmers are not afforded the opportunity
to catch up financially when commodity prices turn around. "You're
sort of in the soup when it comes to the ledger balance."
Nonetheless, the practice is gaining momentum in the United States
and elsewhere. It's estimated that 70 percent of all hogs are now
raised on contract, a dramatic increase from 10 percent in 1990.
Other ag sectors-poultry, fruits and vegetables-have been using
contracts for decades.
Little comprehensive data is collected on forward contracting
in other countries, but it appears to be picking up steam across
the northern border. "Anything you get [regarding contracting] is
by guess or by golly," said Anne Dunford, senior analyst with CanFax,
a division of the Canadian Cattlemen's Association. But it appears
a growing number of Canadian farmers are using forward contracts
and other noncash pricing vehicles.
CanFax surveyed Alberta cattlemen in 1998, and found that one-third
of all cattle were sold outside the cash market-8 percent to forward
contracts, 10 percent to formula or grid prices (based on carcass
quality) and 14 percent were owned by packers. The survey showed
68 percent of cattle still went to the cash market, but Dunford
estimated that all cattle sales were in the cash market just 10
Maybe more interesting is the fact that forward contracting apparently
does not meet with quite the opposition and fear as in the United
States. "I don't think there's as much negativity" regarding forward
contracts, Dunford said.
Instead, ranchers have been more opinionated over packer-owned
and formula grid cattle, which are believed to have more of an effect
on the cash market, she said. On top of the traditional ranching
risks, Canadians also face the uncertainties of a volatile Canadian
dollar, and farmers there see forward contracts as "one more avenue
to reduce risk," Dunford said.
"Those (pork producers) under contracts, they are pretty happy,"
said Martin Rice, president of the Canadian Pork Council. Those
without contracts tend not to like them and believe cash market
prices are unfair because packers have locked in most of their needed
inputs. "As more hogs are taken out of the daily bid and offer system,
what's left over is paid residual (money)," Rice said. The Province
of Ontario requires public disclosure of contractsminus any
party identityin hopes of maintaining fair market prices for
all pigs, Rice said.
In grain farming, between 15 percent and 25 percent of all grain
production is through contracts, involving probably 5 percent to
10 percent of all farmers, according to Errol Anderson president
of ProMarket Communication, an agricultural risk management firm
in Calgary. In general, the "more progressive" growers are involved
in contracting, Anderson said, and look to ensure a profit on every
acre harvested rather than holding out for the highest possible
return for a harvest.
Despite being "cash-whacked" on the open market, Anderson said,
very few small farmers in Canada have forward contracts. "They tend
to be gamblers," he said. "It's greed. Why sell now when [they believe]
it will be higher later?"