Top Crop Manager

Features Agronomy Storage
Manage risk and maximize profit potential

Part one of a two-part series on grain marketing.


November 15, 2007
By Top Crop Manager

Topics

When it comes to marketing new crop canola, a good option is to go for the
flat contract price, or deliver it on a basis contract arranged earlier in the
year. Either price will be better than selling it straight off the combine.

That is just one example of marketing advice growers can get from elevator
agents, grain merchants and even agro-economists. But many growers are not seeking
that advice and it is costing them money. Marketing experts agree that growers
could make more money on the crops they market, but are missing opportunities
to manage risk and increase profits because they do not take the time to build
and execute an effective grain marketing plan.

At the Agricore United primary elevator in Moose Jaw, Saskatchewan, operations
manager Derek Freeman sees it first hand. The week before harvest, phones are
ringing steadily. Growers want to deliver and sell non-board crops as soon as
they harvest. "In this area, our biggest non-board crops are flax and yellow
peas. As we get close to harvest, the price always starts to drop. All of a
sudden, growers will contract 30 bushels an acre on peas – that's their
whole crop," he says. "By not pricing ahead of time, they've missed
out on some $5 peas that could have been contracted a few months earlier and
sold it all for $3.50 or $3.60 a bushel at time of harvest."

Freeman estimates that only one in five growers in southern Saskatchewan use
marketing tools and advisors to get the most cash they can out of the non-board
crops.

Most are cautious growers. They do not like to take risks. Their margin between
profit and loss is thin; the size of their investment is huge. Yet, because
crop prices are constantly changing and because they shy away from marketing
aids, they miss the maximum profit potential from non-board crops like oilseeds
and pulses.

Developing a marketing plan
The other 20 percent of growers, who do get better cash returns, manage the
risks and plan ahead.

They develop a marketing plan, start early, stay disciplined, use contracts
to reduce risk and avoid selling all their crop at once, and potentially at
the worst time of year when the market is low. They do some self-education,
adjust some habits, get some help, take a course and are rewarded with better
cash returns.

"Having a good marketing plan and following through on it is critical
to a profitable bottom line," says Jon Driedger, a Winnipeg Commodity Exchange
economist who presents seminars on how to use grain marketing tools effectively.
For growers who do not routinely develop marketing plans, help is available
from grain companies, independent consultants and government specialists.

"Not everybody's strength is marketing," Driedger says. "It's
worth paying somebody to help develop the marketing plan for your farm. Most
growers will hire an agronomist to help them make crop management decisions;
it shouldn't be much different with marketing."

Growers cannot set grain prices, but they can select advantageous prices when
they are available. Driedger advises growers to, "Try to be as educated
and informed as you can. Combine that with advice from someone who is a full-time
marketer and you should be able to put together a pretty reasonable plan."

An effective plan will reduce the temptation to take unnecessary price risks,
says Freeman. It will have achievable targets and is designed to bring home
a reasonable profit. "Growers won't always hit the highs, but they won't
hit the lows either," says Freeman. An effective plan will also have a
level of flexibility that allows a grower to respond to changing market conditions
if the need arises.

Winter is a good time to begin a marketing plan. "It should be revisited
as things change, probably twice a month," Freeman suggests. "Check
market outlooks, fall pricing, moisture conditions and make adjustments to figure
what will work best."

Key plan components
When building a marketing plan, growers should start with determining their
cost of production, says Freeman. Comparing break-even price is the next component.
This is where allowances for general costs need to be factored in, things like
living costs, grain storage, machinery replacement, interest charges and taxes.

Agronomic considerations are a third component of marketing. These reflect
production on a grower's farm and production trends worldwide for the crops
that are produced. Based on experience, current conditions and the weather,
a yield range for the current crop can be estimated.

Opportunities to grow and sell an identity preserved crop are another component
of a good marketing plan. Often, for a small increase in record keeping, a grower
can get a premium for contracting to produce an IP crop.

Growing IP crops provides many marketing benefits, says Freeman. "At Agricore
United, we guarantee movement by a certain date, guarantee a price and help
you budget. We provide financing on seed and fertilizer for malting barley,
and if it meets the malting specs after harvest, we put you at the top of the
list for delivery."

Other components to consider are cash flow, storage costs and movement opportunities.
For instance, the marketing plan should link sales to dates for major expenses
and for emptying bins for new crop. The plan should also allow for shrinkage,
or spoilage, and interest that could have been earned by delivering the grain
in the bin and investing the cash in things like mutual funds, bonds or other
financial instruments.

"I like to see farmers make a 12 or 14 month plan and keep it rolling.
In fact, I like to see the plan extend to a minimum of five years," says
Neil Sabourin, an Agricore United grain merchant, based in Winnipeg. "The
plan can change daily, weekly or monthly. It's good to keep with a certain strategy,
but if the market tells you the strategy is wrong, don't ignore it, either.
Farmers need to be aware that grain markets are increasingly volatile and they
need to be responsive to market changes."

Sabourin adds that the plan should provide enough flexibility for a sell off
schedule when there is a market spike. "You need to be reactive to things
like a crop production problem in South American soybeans, but you also need
to pay attention to your specific costs.

"Don't depend on emotion and don't worry about coffee shop chat, but do
watch for market signals," Sabourin advises. "For a disciplined approach,
every morning choose one or two market analysis sources to read or listen to
and this will help you start forming opinions about what's happening domestically
and internationally and how these can affect your prices. And weekly, phone
the grain companies to ask their opinions about the markets and programs that
could affect grain pricing or movement." -30-