Six steps to help you market your grain
Commodity marketing can be like dancing a two-step with work boots on. Your timing is often off, you’re dragging your feet, and you trip way too often.
With volatility making our commodity markets more erratic, and with more information spewing out of our smartphones night and day, marketing is getting ever more complicated.
Dancing with tighter margins also means a small misstep can cause a lot of pain.
So now that the super cycle of sky-high grain and oilseed markets has faded into memory, it’s time to take your marketing up a notch, employ all the tools, become more disciplined, and make the most of any opportunities that come your way.
Improvement is possible. In fact, it can even be realistic. In the following pages, we bring you advice from three top commercial marketers, with their six key strategies for superior results.
No one is sugar-coating the job. Based in Winnipeg, Agri-Trend marketing coach Lawrence Klusa captures the crux of today’s marketing challenge in a single sentence. “To be successful over the long-term, farmers need to be successful both when market prices are higher and when market prices are low,” Klusa says
Then there’s this extra complication. “What works one year might be totally wrong the next,” says Frank Backx, marketing manager at Hensall District Co-operative north of London, Ont. “Grain and oilseed markets are continually changing, and every year provides different challenges.”
And, adds David Derwin, portfolio manager with PI Financials in Winnipeg, who worked on the floor of the Winnipeg Stock Exchange for years.“The next few years, managing risk is going to be more challenging.”
Following are six strategies that will help you take your commodity marketing from good to great, say Klusa, Derwin and Backx.
Get ready to dance.
1. Know your farm's financials
A few years ago it was easy to be lullabied by the dreamy returns for delivering off the combine, without any storage costs, without even thinking about cost of production — just show up, dump, and wait for that lovely transfer to hit the bank.
But with current markets, knowing your farm’s financials is an imperative first step to marketing. And it should be done long before seed is in the ground.
Although many more farmers have learned to link input costs to market prices, some farmers have gotten stuck in the watch-and-hold mode, waiting for grain and oilseed prices to go higher without taking advantage of opportunities along the way to capture returns over their production costs.
Backx gets right to the point. “The main difference between average and excellent marketers,” he says, “is knowing cost of production, and being willing to sell at levels that turn a profit.”
Knowing your financials for each crop makes it easy to accept sell decisions and move on. Once an order is filled, great marketers ask themselves where’s the next sale, instead of dwelling on what’s done. They know they made a profit above their costs. “After pulling the plug, strong marketers don’t look back to see if it was the right decision,” says Backx.
Many provincial agricultural ministries have cost-of-production spreadsheets on their websites. On Manitoba’s, for instance, you get a fill-in Excel spreadsheet to track your marketing plan and harvest results, with cells to input your operating and fixed costs for cost of production. There are even webcasts explaining logistics, how to use options, and the details of futures trading.
At some point during the crop year, most crops, most years, will offer a price that allows you to make a profit with that crop, says Klusa. Enterprise analysis helps identify which crops to grow to maximize returns, and the analysis will also give you a sense of what price is required to sell that crop at a profit. “Knowing which crops are profitable and what is a profitable price are keys to a successful marketing plan.”
A sometimes-neglected part of a successful marketing strategy is linking it to a farm’s overall financial numbers, including cash flow, debt repayment, expense payments, and operating line exposure in order facilitate both margin marketing of hedging of inputs and as well as outputs.
It’s a process of understanding your farm’s net exposure. Usually good marketing advisers will embed in their services a spreadsheet to help track things like acres, yields, expenses, debt servicing and production to be marketed for their clients.
On livestock operations, hedging both inputs and outputs is becoming more common, especially by pre-booking both feed grain prices and sales prices to guarantee a margin. Most are using only cash sales and cash purchase, not options. However, other businesses, like the corporations handling your grain and selling you inputs, use futures to mitigate market risk on both sides of their budgets. “Don’t you want to level the playing field as much as you can? “ asks Derwin.
Derwin also suggests benchmarking your selling results against yourself over multiple years, as a percentage, rather than in terms of dollars per bushel. Year-over-year will give you a clearer idea of how to improve your marketing strategy, regardless of market prices.
2. Take a team approach
A solid marketing team will give the farm multiple eyes and ears. It will also keep decision-makers accountable to others, and it offers a built-in sounding board for ideas.
Top marketers meet with their marketing teams and review plans often, at least weekly. Together they look at the plan, update price charts and basis charts, and make sure offers are called in.
By talking about marketing out loud, a team approach helps ensure all avenues are explored, although this doesn’t mean that everyone has to agree all the time.
Still, if the decision gets talked about by the team, it helps stop the blame game if a sale happens to go south. At least everyone knows what the alternatives were, and why the decision got made.
Plus, having to report to a team helps ensure that the farm’s marketing plan actually gets implemented.
Team membership can vary with the farm, including farming partners, managers, children and couples, but everyone has to be knowledgable about markets and understand not only the tools available but also the farm’s objectives.
A similar option is to pay for market advisory services. More farmers are concluding they can’t do it all, and they’re looking for help in areas where they may not have all the expertise they believe the farm needs. “As farms get bigger, and as operations become more complex, I expect more and more bushels will be managed by marketing experts or coaches,” says Klusa.
For example, one of Klusa’s clients last fall had low-grade chickpeas over a year old. The farmer was frustrated with trying to market them and was going to feed them in his livestock operation replacing a $4-per-bushel feed grain. Klusa kept pushing the crop into commercial channels, where they eventually sold for over $13 per bushel, netting the farmer just under $100,000. And that was just one minor crop on this producer’s farm over a short time period.
Some simply don’t have the time to fully understand certain aspects of their operation (in this case marketing) and hire experts to help them. Or maybe it’s just because of the large dollar amounts and risk involved with marketing decisions. Another educated voice to offer alternatives and help make decisions can be invaluable, considering the complexity of understanding various marketing strategies.
Besides, it takes a huge amount of time to stay on top of all the market information. Part of an adviser’s job is to filter through information and source out new ideas. Moving from understanding the local markets to monitoring and evaluating outside influences can improve marketing but often that takes some outside help.
“There’s no lack of information or opinions out there,” says Klusa. “Putting it all together to make good decisions is what takes some time and skill.”
Plus, all that information can create an additional danger if you don’t have a system in place to review the markets and make decisions. It can be easy to become overwhelmed, says Backx. It can be easy to get confused by listening to too many experts too, and often the result is procrastination.
3. Learn to use more tools
Although you don’t need to be an expert and continually track markets, it’s important to become aware of the systems and tools that are available and to be able to ask questions to build a solid marketing strategy. “Do your homework, so you can ask the right questions,” suggests Derwin.
It’s a leap to go from knowing that something exists to actually using it. However, it doesn’t take a huge financial commitment to open a trading account. For a 3,000- to 5,000-acre farms a $25,000 deposit would generally be enough to start a trading account, he explains, although the fees per trade or annually depend on the individual company.
“Every year it’s important to try to capture value but using marketing tools is more important in break-even years. That’s when they can make the difference between having a so-so year to having a disaster,” Derwin says.
”Don’t spend time guessing what’s going to happen to the markets. Instead spend time learning ways to manage your farm’s risk,” he says.
All three of our advisers agree that today’s Canadian farmers are more disciplined and have a better idea of target pricing and minimum price contracts. Excellent marketers also have a greater understanding of how to hedge, sell direct, and pre-book contracts to counter the volatility of the markets. The farms that get more aggressive at pre-booking also use crop insurance and options to offset their more aggressive forward sales.
Using put options to price protect without having to commit to delivery is another marketing tool. Calls are used as a cash replacement or to create a minimum price contract when shared with direct delivery contracts where situations warrant. Buying put options connected to your cost of production is like buying insurance on the price falling to the point of your farm having to absorb negative margins, says Derwin.
Derwin says that strong marketers not only look for profitable selling opportunities but also consistently protect the downside. “Can they go lower? Of course they can,” says Derwin. “The question is what are you going to do about it?”
Beyond cash sales, there are three major ways to take advantage of higher pre-harvest prices: forward contracts, futures contracts and options. According to a study by University of Guelph economist Richard Vyn, strategies using futures or options tend to do better than those with forward contracts because the price of an entire season’s production can be hedged.
Yet only five to 10 per cent of Canadian farmers use futures and options, compared to a third of U.S. farmers.
Several factors have contributed to this disparity, says Derwin. The futures industry developed in the U.S. and that’s where the big commodity exchanges and brokerage firms are located. So the concept has been known there longer and there’s been more education around trading futures and options.
Also, Canada has a much greater on-farm storage capacity, so the pressure to sell crop off the combine is lower. Furthermore, the former long-standing Canadian Wheat Board monopoly on western grain marketing may have changed the dynamics and attitude for generations. Under the system, grain deliveries were set and staggered, so the other crops (such as canola) were often considered harvest cash commodities.
Or, the difference in our uptake of options may simply be due to societal differences, with Canadians traditionally being a little more conservative and shy to try new things while Americans are generally considered more proactive and aggressive.
However, today Canada’s farmers have a very different mindset about commodity marketing, particularly the younger generation. The ability to market is now considered accessible to everyone, anytime, anywhere. “It’s often the younger generation who I deal with on the week-to-week transactions. They’re the ones who are managing risk,” says Derwin.
4. Yes, you need a marketing plan
It’s one thing to know how to do something and it’s another to actually do it. But if you have a predetermined written strategy using those tools, it’s like starting off on a higher rung of the management ladder.
Not having a written marketing plan is one of the major mistakes farmers make, believes Backx. “That’s why it’s imperative that producers have a written marketing plan, with pre-determined objectives, and why they choose the target prices to sell at,” he says.
With the increased volatility in the grain markets, making a series of 10 to 15 per cent (or five to 20 per cent) sales will work better than trying to hit the highs. Consistently stronger marketers often use the simple approach of incrementally selling with a combination of cash sales and forward booking.
A common mistake Backx sees over and over again is not forward contracting anything when prices are profitable, adding “One of the most common mistakes is trying to hit the home run, instead of singles.”
As the understanding and comfort builds, the strategies get more aggressive and complex. They tend to forward sell more of their crop than they had prior to using our marketing services, says Klusa. The impact of a good or bad impulsive decision multiplies as farm size gets bigger.
A 6,000-acre farm sells about 250,000 bushels of grain, oilseeds and pulses, says Klusa. Changing the average price by only 50 cents a bushel changes revenues by over $100,000.
The plan for each farm is unique and somewhat flexible depending on crop mix, grain marketing understanding and risk tolerance and looking for market opportunities and trends.
To have a successful grain marketing strategy, farmers need to have a good sense of market fundamentals or have access to someone with an in-depth understanding of the markets, says Klusa.
Better grain marketers make better decisions because they have the tools and expertise to know their farm operations, they know their farm financials, understand the grain markets and understand market timing.
And they get better over time. “As farmers become more comfortable with the information and expertise, they usually become more aggressive in their marketing strategies and tend to forward sell more of their crop,” says Klusa. “This often involves using new or more complex strategies than they used in the past but, not necessarily.”
5. Watch the charts
Although it’s impossible to predict what the markets are going to do, it’s quite possible to be aware of good selling opportunities, if you stay on top of the situation. Excellent marketers make marketing a year-round project, reviewing their position at least weekly. Some advisers suggest making decisions early in morning, before the market opens.
The reality is that no one knows where the top will be, or the bottom. However, strong marketers like to know general price direction, and good market analysts will be able to tell you what market factors to watch and how these market factors will influence crop price direction. They look for trends. Charts can help identify which commodities have the best upside potential, which are likely to remain flat, and which crop prices are likely to decline going forward, says Klusa.
A good online source for all sorts of charts is www.barchart.com. It includes stock market and commodity markets and from what has happened to prices in the last two weeks to what price levels have done historically.
Even if you do not trade futures or options, do watch charts so you know where and when to place orders to get cash grain sold or new crop contracted ahead. “Selling in the top one-third of a crop’s marketable price range is another key aspect to a successful marketing strategy especially when markets are declining,” says Klusa.
The Chicago Mercantile Exchange is where most of the options and futures are traded so on their website (www.cmegroup.com) you can find prices for options. The charts show the base global prices for corn, soybeans and livestock. This is the source for getting a good sense of what’s happening in the market daily.
Understand that timing is often more important than price. “Market timing is a very important aspect of any market strategy, especially in times of falling commodity prices,” says Klusa.
However, identifying specific market timing opportunities is complicated and time-consuming and can cause information overload. Derwin suggests excellent marketing strategies focus on trends of the agricultural economy. They follow commodity trends over many years, and look for trends of stock prices of agricultural businesses. Some of the charts will show some overarching trends that can be extrapolated into future grain markets.
Risks and timing are automatically incorporated into the cost of buying call and put options. The more volatile the market and the further out you book, the higher the cost. Deciding how much that “insurance” premium is worth depends on your farm’s risk tolerance.
Often strong marketers follow and chart local basis levels. The website, www.pdqinfo.ca, gives cash and basis levels from nine different Prairie regions. This information levels the playing field between elevator bids and allows for some transparency in the market, including between the large grain companies. In Ontario the basis is not as easily tracked and is highly impacted by U.S. sales.
In Ontario, basis is more difficult to follow. Basis is fluctuating more than ever, primarily due to Canadian currency swings, says Backx. “There is a very strong negative correlation between Chicago and basis in Ontario. It seems when commodities rise, grains participate,” he says. “Stronger commodities (such as crude oil and metals) causes a stronger CAD, and basis gets lowered.”
This is why Backx strongly recommends flat-price sales only. He says if you do only futures or basis first, and you do the wrong side first, you can get a double whammy very easily. He prefers incremental, flat-price sales on a scale-up basis as the best marketing plan. “Often there’s money left on the table (such as in soybeans this year), but as the old saying goes, you never go broke taking a profit,” he says.
Beyond the charts, farmers need a strong baseline of matching the farm’s cash-flow needs with some sense about when is the best time to make crop sales to maximize returns. Strong farm marketers know which crops to sell first and which crops to hold, choose the right pricing vehicle at different time periods during the crop year and know when to be aggressive and when to be defensive in setting prices, applying new cropping ideas and making large capital purchases.
6. Analyze your farm's potential
When harvest is over and done, excellent marketers take the time to look at their farm’s overall strategy, connect with buyers and consider new opportunities.
They also review the year and look for crops they could potentially grow and learn how to grow to maximize returns, says Klusa. With that profit mindset, they consider crop rotations and inputs requirements to continue to be successful in the years ahead.
Top marketers are always on the lookout for new opportunities and synergies. Read, ask, think, listen and look around. Is there a backhaul or a new processor in the area? Did the specialty crop your neighbour grew last year turn out well? Maybe there’s a chance to go together with another farmer and deliver a full load directly to a processor?
Take some time to do a new SWOT analysis focused on farm’s marketing. Have a good hard look at your farm’s strengths and opportunities, weaknesses and threats.
Then, together with your marketing team, start writing a new marketing plan for next year.