According to some onion marketing agents, contracts are a useful hedge against risk. Others say sudden and sometimes sustained market spikes make the risk worth taking.
Retailers, on the other hand, are trending toward contract buying, marketers said.
“With the economy, Wal-Mart and others are changing the way they’re buying,” said Marty Franzoy, manager and owner of Hatch, N.M.-based Skyline Produce, which also has acreage in Las Cruces.
That has been a blow to some growers and shippers, he said.
“You set up your facility for millions of dollars and they just dump you,” Franzoy said.
“This last time, they want to go to the grower instead of the broker that may have onions or not, so you have to have the onions.”
Brokers end up being frozen out, Franzoy said.
“It has sure changed things up,” he said.
“That makes me scared to seek that business and spend money on equipment because they may invite somebody else.”
It’s a more economical way to do business for retailers, though, Franzoy said, and he said it likely would continue to move in that direction.
“If it’s cheaper, they’re going to do it,” he said.
Franzoy said he doesn’t sell any of his onions on contract.
“I usually just go on the market, and where I’ve made most of my money is playing the market,” he said.
He said he also knows it’s a risky strategy, but acknowledged that some growers prefer to play it safe through contract pricing.
“Farmers are competing themselves out of business, chasing the same business,” he said.
Other growers play it safe.
“Everybody around me has a (contract) program, and most of their onions are already priced and spoken for,” he said.
Price spikes cost those growers, he said.
“There (are fewer) onions for those who don’t play that game. I’m making money in that,” he said.
Contract pricing represents a major change in the onion business, said Wayne Mininger, executive vice president of the Greeley, Colo.-based National Onion Association.
“There’s a lot more forward pricing and contracting than there was quite a few years ago,” he said.
The onion business has changed in multiple ways, including the numbers of varieties and formats available to consumers, but contract pricing may be the biggest change, Mininger said.
“It used to be all the product was a post-market and all the handling and distribution was spot market, and there was no 60- or 90-day price,” he said.
He acknowledged there’s still some philosophical disagreement in the industry on which is the right way to go.
“Producers on the open market could sometimes enjoy a month of fantastic price hikes that would make the whole world look rosy, but contract pricing eliminates that,” he said.
The retail customer is the ultimate judge, however, Mininger said.
“Buyers want to see a consistent price in their store and want to know they’re going to pay X amount all year-round, so they’ve locked in their costs,” he said.
Hermiston, Ore.-based River Point Farms LLC contracts most of its 500 million pounds of onions each year, said Bob Hale, president.
“The fixed-pricing, fixed-margin part of our value proposition is sell it first, and that gives you more certainty,” he said.
The challenge, he added, is in understanding the marketing that works for the grower and customer.
“Certainly you don’t have the highs on the spot market, but you don’t have the lows like you have this year,” he said.