When is a good time to contract?
Shay- The best time for a customer to come to me for a contract is a month or more before my planting season even starts. There are many ways to grow an onion: you can focus on size, single centers, storability, sweetness, pungency, duration of season, or any other variable. If I know what to grow and how to grow it, I can assure the best results for my customers. That is why buying from a true grower/shipper/marketer is so important. While custom packers have volume, they have little control over the growing process.
John - Know what your customer’s needs are and what they are doing with their onions. Some may need onions more suitable to food service and others to the retail market. Knowing when to switch from old crop to new crop is also key. Contracts should be setup a month before the start of planting. This will assure the most consistent and competitive pricing. Contracting without the outbound business there is a gamble, but if you have committed customers you should contract year round.
Who should contract?
John - If you are in food service, processing, or other areas with consistent outbound pricing you should contract; anything with a structured retail price. Worst case scenario you should be at least 50% contracted. This will help hold you average and protect you in high and low markets.
Shay - I agree with John on all points except one. History has shown that the average “spot market” prices are $1-1.50 higher than the average contract price. So if you are going to error, error on the side of a contract. On average you will come out a winner. Also take into consideration that if a contract is higher than the “spot market” you are usually talking about $.50 to $1.50. On the other hand, if the “spot market” is higher than the contract you may be talking as much as $10-$15! See the graph below for a clear picture of the savings.
With whom should you contract?
Shay - As a Grower/Shipper, of course I think you should contract directly with the grower. Working directly with the grower you can get your onions grown the way you need them, especially if you go to them early. If you contract with a “custom packer” you won’t have the same type of control. They will bring onions in from many different growers, almost all of whom are looking at maximizing their yields, which may have an impact on your quality and length of shelf life.
John - Contract with the person you are the most comfortable with. You may wish to contract with a larger company because they will have more shippers to turn to cover a contract. It may also be smart to split up your contracts. You could do one with a marketer (broker) and one directly with a shipper.
Why may onion contracts be more important than contracts for other agricultural commodities?
John - Onions are used in large volume across the country. Onions have a tendency to go up and stay up, unlike leafy items that go up in price, but quickly come back down. A contract will give you a steady control over the price of your onions so you don’t lose money in a time of high fluctuation.
Shay -Onions are not like other commodities, they are sold on a world market. Weather, draught, and disease in places thousands of miles from the USA can have dramatic impacts on the market here in the USA. On the other hand, commodities that can’t be shipped across entire oceans, and are destined to be sold domestically, tend to be less volatile over the long- term.
Some would argue that following a year with high prices, that it is a wise time not to contract as farmers like to “chase money”, but with onions that isn’t always a wise move. Like other commodities, the down swing on onions may be 20% when compared to the spot market, but the upswing can vary from many other commodities. Instead of seeing just 20-40% on the upswing of the market, as is generally the case with ag commodities, it is not uncommon to see increases of 200% or more when it comes to onions. In other words if you don’t have a contract, it doesn’t take long to wish that you did.