Marketing plan maximizes profit potential
By Top Crop Manager
Effective marketing plans can help growers manage cash flow, minimize risk and maximize returns.
Harvest 2005 was challenging for Cory Rasmuson, a pedigreed seed grower from
Wetaskiwin, Alberta. Yields were great but the weather just would not co-operate.
Even the canola had to be taken off a bit damp. Long before the last field was
combined, Rasmuson knew he was going to be caught in the type of a nightmare
situation few producers even want to think about: bins full of tough canola,
near historical low prices with bills coming. Fortunately, he was able to work
with his local Agricore United customer service representative, Jim Nichol,
to come up with a marketing plan that would make the best of a bad situation.
Rasmuson sold three-quarters of his unpriced canola using a guaranteed minimum
price contract from Agricore United. This allowed him to haul all his canola
directly to the elevator, eliminating the risk of storing tough canola while
still allowing him to take part in any future market upsurge.
"The advantage is that it's money now," explained Rasmuson. He was
looking for a way to increase his cash flow and still capture increases in the
market. "I get to ship the product and I get paid for it right now. That
means I can manage a lot of bills and my bin space."
Traditionally, most farmers in Rasmuson's position would have dumped their
canola and accepted whatever the price they could get on the spot market. The
alternative, storing the crop, borrowing more money to pay the bills and gambling
that the grain will not heat until commodity prices rise, is just too stressful.
Rasmuson sold his canola, which eliminated the risk of spoilage, but since he
expected the markets were going to rise, he left the possibility of getting
a higher price for his crop open by using a guaranteed minimum price contract,
according to Nichol.
|Wetaskiwin, Alberta, grower Cory Rasmuson (left) with help from
Agricore United's Jim Nichol developed a marketing plan that utilized grain
contracts to increase his cash flow but still take advantage of increases
in the market.
For a fee that covers the cost of the option, guaranteed minimum price contracts
allow producers to lock in the spot market price on the date of signing the
guaranteed minimum price contract. The contract then allows them to take advantage
of any price increase before the contract expires.
Rasmuson contracted 421 tonnes of canola, roughly half of his crop, using three
guaranteed minimum price contracts. Two of these contracts are priced off the
March futures, which gave him until February 17 to lock in a price. He chose
the May futures for his third contract to target the market's traditional peaks
at the end of May. This contract does not need to be priced until April 21st.
Contract fees are variable and are directly dependent on time value and market
volatility. Rasmuson paid $14 a tonne for the March contracts and slightly more,
$19 a tonne, for the one in May. As long as the futures market rises by more
than the cost of the contract fee, Rasmuson will make money. For example, if
the spot market price was at $250 per tonne on the day he signed his March contracts,
then as long as the futures rose above $264 by February, he would cover off
the costs of the guaranteed minimum price fee.
"I have the best of both worlds," Rasmuson says. "I don't have
to worry about it heating in the bin, I don't have to go out there and start
augers when it's 30 or 40 below and I've already been paid."
Producers like Rasmuson are finding that designing an innovative marketing
plan has become an essential part of successful farm management. "Marketing
is the only way we can get ahead now," Rasmuson says. "We're zero-tilling,
our yields are incredible and we are at the point where we can't get any more
efficient, so we have to look for other ways to increase our income. Finding
a niche market would be nice but even if you can't, it's always possible to
do better if you know how to market your grain."
"In the past, the grain bin was almost treated as a chequing account,"
says Jon Driedger, a risk management consultant with FCStone in Winnipeg. "When
bills were due, growers would take a couple of loads to the elevator and get
what they got. That doesn't cut it anymore. Marketing plans need to be made
well in advance of seeding and strike a balance between cash flow needs and
getting the best prices."
When marketing grain it is important to know your profit/loss point, the price
and yield combination you need to make money. As long as you can sell above
it, you are making money. Since this number can vary widely from farm to farm,
each farmer needs to take time to calculate their own cost of production.
"More and more people are starting to know their cost of production and
they are pricing off of that," Nichol says. "There aren't enough yet,
but I encourage everyone to start with this and use it as a guide to lock in
a certain percentage of their crop at a profit. It's a good way to capture market
peaks that do come up. Rallies don't seem to last very long or be very high
anymore so the best way to capture them is on paper."
Nichol and Rasmuson start working on a marketing plan for the upcoming crop
year well before seeding. "I'll start booking my canola as early as March,"
Rasmuson says. He will use both production contracts to lock in a guaranteed
price and also basis contracts to lock in his shipping and handling costs.
"Having a plan allows me to control my own destiny," Rasmuson says.
"I try not to lock in over 30 percent of my expected bushels with production
contracts. I price in more and more of my production as the year progresses,
so by harvest time three-quarters of my canola is already sold. By the time
harvest is over all but a few super Bs are gone."
Rasmuson prefers a guaranteed minimum price contract because it gives him the
advantages of the futures market without the risk. "Our contracts have
a flat bottom," adds Nichol. "You get your money in your pocket minus
the fee and you can't lose any more than that."
As of December 2005, Rasmuson was still optimistic that he has made a good
investment decision and canola will rise from its present lows. However, with
the monster 9.6 million tonne canola crop still weighing heavily on the markets,
this is far from certain.
"We still have a couple months before we have to lock in half of the canola
and until April for the rest, so there is still hope for a rally," Rasmuson
says. If the current low price trend continues, he would have done better if
he had taken out a guaranteed maximum price contract.
"The 'max' contract is a very good option if you think the market's going
to crash, but farmers don't like to think that way," Nichol says. The nice
thing about either contract is that you have already been paid for your canola.
Even in a worst-case scenario, where the market goes the wrong way, the most
you can lose is the fee associated with the guaranteed contract. This is a minor
cost versus risking the grade discount associated with heated canola.
"No one has a crystal ball, so you have to make the best decision you
can at the time," Driedger says. "Hindsight is always 20/20. Even
if the market doesn't go in his favour, these contracts weren't a bad strategy.
They let him move tough grain and pay bills while still giving him the chance
to capture some upside. I think, given the circumstance, Rasmuson made a pretty