Cheap Is the Commodity Kryptonite, Adding Value Its Salvation

I heard from Manitoba this past week over last’s week’s column on “Orderly Marketing”. It came from a DTN reader who has read this column for many years and actually showed up on my door once near Dresden Ontario and asked, are you Phil Shaw? We had a brief discussion on wheat marketing but ended our email exchange with pictures of our respective farms. It is all so different and all so the same. One of these days I have to get back to Manitoba.

When I looked at his pictures, I had to marvel at the vastness of Western Canada. He had taken pictures of his farm from an airplane. As I looked west, basically, it was all farmland until the Rockies. That’s a long way and in many ways, it reflects the difficultly of any Canadian agricultural policy maker in embracing that diversity. There are a lot of different commodities and personalities below that plane. Getting it right continues to be a challenge.

Part of that challenge remains in our agricultural marketing. There are a myriad of ways for us to get paid, but for many of us that means selling our agricultural commodities, whether that is soybeans in Manitoba or soybeans in Ontario and Quebec. Marketing an indistinguishable product especially in a food setting usually makes that product as cheap as it can be.

I don’t particularly like it that way, but you have to ask yourself at times, just what a commodity is? There are a few definitions, but basically a commodity is a basic good which is interchangeable with other goods of a same type. There is little differentiation coming from one producer to another. For instance, think of a bushel of soybeans from Manitoba or Brazil? Think of a barrel of oil from Saudi Arabia vs Pennsylvania, vs Oil Springs Ontario vs Fort MacMurray Alberta. You get the picture, for the most part these commodities are traded on futures exchanges, which determine values world-wide in some cases, or within a specific country or region. There are variations on the theme, but basically a commodity is a commodity.

The closer you get to a consumer’s dinner plate the better. For instance, I consumed some blueberries the other day, which I learned from the package were from Peru. My first inclination is always to wonder how the farmers in Peru were able to grow these blueberries, ship them to Canada and get me to buy and eat them. Ditto, I suppose for food products like pickles from India sold at dollar stores in Ontario. From a taste perspective, the blueberries and pickles don’t taste much different from blueberries and pickles raised here. So, they find themselves on the global market as “commodities” as long as they are cheap enough to make it all work. Cheap is the lubrication what makes commodity markets work.

Are there variations on this theme? Sure, there is, but the basic premise of what a commodity is and how it is valued is very important to understanding how this world works. Think of Russian, Ukrainian, Australian, Canadian or American wheat. Who will win that tender to ship wheat to Bangladesh? That’s right, the cheapest wheat will win. At the end of the day, wheat is wheat, a commodity of indistinguishable bushels or tonnes.

In Bangladesh, where I’ve visited seven times over the last 27 years, the wheat is unloaded into smaller and smaller units of transport to be utilized. There are many Bangladeshi entrepreneurs in the food business, just like there are others around the world. The same thing is done in Ontario and Quebec, where millions of bushels of non gmo soybeans are loaded in containers, both bulk and bagged and shipped to Asia. When it gets there, its distributed with Asia end users taking a bag home for themselves.

That’s the value-added portion of commodities that needs to be emphasized over and over. Wouldn’t it be nice if I could sell my soybeans bag by bag to Asian end users? Actually, there are some farmers who do that, accepting all the inherent credit risk. How about selling bacon instead of pigs? How about selling ethanol and DDGs instead of corn? You get the picture.

Agricultural policy, which encourages value added, is needed even more in the cheap commodity world. It comes with invested from government, see ethanol, see CETA trade agreements, see even the new Carbon Climate Change initiatives. Producer groups can always push toward this. That’s a big reason why we have ethanol across North America today.

A few years ago, a farmer asked my crop supplier if he sold baler twine and he told him it better be cheap, as baler twine was like a commodity. My supplier laughed and said, yes, it’s a commodity. I was left confused.

However, not for long. A commodity is a commodity is a commodity. Cheap is its kryptonite. As farmers we need to understand that as it helps when understanding our agricultural commodity futures market. Going further though, there can be value added variations on that theme. There is money to be made. The more we differentiate aspects of those commodities, the better off as farmers we will be.