Grain Marketing

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Developing a Grain Marketing Strategy
from Saskatchewan Agriculture, Food and Rural Revitalization

Why do you need a marketing strategy?

Over the years there has been a tendency for grain producers to concentrate on producing a good crop, and spend much less effort on marketing it. However, in these times of low commodity prices and slim profit margins, growing a good crop is no longer enough to guarantee a profit.

Developing and implementing a sound marketing strategy is one of the first steps toward establishing a profitable marketing program. A marketing strategy will help you make reasoned marketing decisions, rather that have out-dated information or impulsiveness influence you decisions. A marketing strategy will not guarantee that you will always sell a commodity at the top price, but it will help you to manage price risk and improve your market returns.

Make choices, set goals, and get involved

Grain and oilseed producers have many marketing choices available to them. These choices include what to grow, and how and where to sell the production.

Wheat and barley can be sold through the Canadian Wheat Board on general quota, or on guaranteed delivery contracts. Feed wheat and barley can be sold for export through the Wheat Board, or as non-Board feed grain to elevator companies, fed to livestock, or sold to feedlots and feed mills.

Oats, rye, canola, flax, and special crops are sold on the open market. A wide array of pricing and delivery alternatives are available for these crops, including cash sales through the elevator, deferred delivery and production contracts through a grain company, futures contracts, futures options, delivery against a futures contract to terminal position, and self-loaded producer cars.

Producers need to evaluate all grain marketing alternatives, existing market trends, and market signals in order to make sound marketing decisions. The planning process requires commitment.

A successful marketing strategy requires that you be committed to a unique marketing plan, suited to your individual farm needs. Active involvement in all aspects of marketing from gathering market information, to analysis of market trends, to preparing a plan and putting the plan into action, is crucial to your success. You should also be willing to try new techniques, and learn from mistakes.

A sound marketing plan should have five goals:

Choosing crops that have the greatest income potential.
Pricing and marketing all non-board grains according to a predetermined plan, rather than by ad hoc decision-making.
At prices above production costs, and above the yearly average price.
Pricing according to prevailing market trends.
Reducing risk of price erosion from falling market prices through forward pricing strategies.
Reducing marketing costs by closely monitoring the basis and timing grain sales when basis levels are low. (For more information refer to SDAF FarmFact publications, "Understanding the Basis", And "How to Use the Basis".)
Reducing storage and interest costs by early marketing.

A comprehensive marketing strategy requires some knowledge of how the futures market operates. Inexperienced producers should be aware of the risks involved in futures trading, and enrol in a training program. Contact your local Extension Agrologist for information on futures market training programs in your area.

Sticking with a pre-set marketing plan in a disciplined way is a critical part of a successful marketing strategy. Discipline is required to avoid unnecessary price risk.

By staying in constant touch with the market you will ensure that you have the information needed to take advantage of price rallies. But the marketing plan should also be reviewed and revised on a regular basis as supply and demand conditions change.

How to get started

Based on experience and variety recommendations, examine the crops that could be considered in your production plan. Consider all the important agronomic factors including crop rotations, herbicides, equipment requirements, and management needs for your farm.

Estimate the cost of production for each crop. This can be used to determine the break-even price for the commodity. Break- even prices can be compared to current market prices, and the projected market outlook, to help determine the most profitable crop. Pricing strategies should be geared to selling at prices above the break-even level. Determining your cost of production is also useful to ensure that your Crop Insurance coverage is adequate to cover your operating costs.

Production costs can be gleaned from the previous year's income and expense statements. A cost of production worksheet is provided on Table 1 (For detailed comparison and calculation of individual farm production costs, refer to the SDAF publication, "Crop Planning Guide", for each soil zone.) The break-even price for the commodity can be calculated by dividing total cost by expected yield.

Good marketing decisions require good marketing information. Good marketing information is obtained from several reliable sources including the elevator company, commodity broker, market analysis newsletter or weekly farm paper. As well, the general market and financial news sections of daily and weekly newspapers can provide you with a well rounded, balanced market opinion.

Good market information should highlight the market outlook, and contain some analysis of supply and demand conditions. Evaluation of vital national and international political developments affecting the grain market is also valuable.

Analysis of daily and weekly price charts, called "technical trend analysis". Is an important part of overall market analysis. Following the charts to plot "trend lines" is helpful to indicate the short-term direction of the market. Trend analysis is valuable for timing of hedges and other pricing decisions.

Market information is useful only to extent that it helps you make an informed decision about what might happen to the markets in the future. It is important to focus on all factors that may affect market prices in the year ahead, rather than base decisions on conditions which occurred in the previous year.

You will be ready to make crop choices after completing an agronomic review of crop rotations, the cost of production, break-even calculations, and the market outlook. Final crop selection should weigh all the production and marketing factors and be based on which crops pay the highest net return.

Implementing the strategic plan

The key to the success of the strategic plan is using a 12 to 18 month planning horizon. The plan includes different strategies for pre-seeding, pre-harvest, and the post-harvest period, while striving to achieve the five goals set out in Section I.

Establishing Price Goals or Target Prices

After you calculate break-even prices, and analyze the market outlook, you are ready to set your own target price. The target price will be the triggering mechanism for selling non-board grain within the strategic marketing plan.

Since it is impossible to pick the top price every time, you should set targets at an attainable level which will still yield a satisfactory profit. The goal should be to sell at prices which are above the average price of the year, preferably in the top one-third of the annual price range. For example, if the price range for canola in the coming year is predicted to be between $5.00 and $6.25 per bushel, a realistic target price might be $6.10 per bushel.

Since the target price triggers a pricing or selling signal, discipline is required to ensure that the plan is carried out and sales are made when the market price hits the target price. This is necessary so that you are not tempted to hold on for a higher price after the market has reached the target level. Discipline is required to avoid unnecessary price risk, resulting from price speculation in a rising market, or panic selling near the bottom of a falling market.

Forward Selling Strategies

Forward selling ro forward pricing is a key element of a marketing strategy. It provides an opportunity to capture strong prices during a market rally, before the crop is seeded or harvested. Forward pricing is triggered when market prices move up to the target or trigger price (see Figure 1).

Forward pricing can be done by using a deferred delivery contract, hedging on the futures market, purchasing a futures option or Price Protection Agreement (minimum price contract) through a grain company.

It may be profitable to forward sell only a portion of your expected production. Typical amounts you would forward sell would be 25 to 50 per cent of an average crop, when you place a pre-seeding "short" hedge (or deferred delivery contract) and an additional 25 to 49 per cent in mid-summer. It is unwise and most likely not profitable to forward sell 100 per cent of expected production in case reduces crop yield. The risk of prices moving higher after you have forward sold can be reduced by taking out a call option. (For more information on Futures Options refer to SDAF publication, "Understanding Futures Options" or contact the Winnipeg Commodity Exchange.)

After Harvest Strategies

Price protection strategies after harvest are important because the value of stored grain can erode. Storing unpriced grain is a form of speculation; speculation that the price will go up. Holding unpriced grain in a declining market is a significant risk, if the price does not go up.

Grain prices tend to drop at harvest time because of the large volume coming on to the international market (low futures price) and ample supplies in the local market (wide basis). Close adherence to the marketing strategy will reduce the risk of selling in a depressed market. There is less pressure to deliver at harvest if you utilize forward selling strategies such as a pre-harvest hedge or deferred delivery contract.

Wide basis levels are a signal that the marketing system is congested, as is generally the case right after harvest. Once deliveries subside, buyers become more competitive. Waiting for a narrower basis reduces marketing costs and increases your return.

Storing unpriced grain can be a worthwhile strategy when market prices are expected to improve and/or if the basis levels are wide. However, the anticipated improvement in market prices should be as large as the cost of storing the grain. (For a more detailed explanation of carrying costs, refer to SDAF publication, "Does It Pay To Store Grain?")

Under conditions when it is unsafe or expensive to store grain and when the basis is narrow, it is wise to deliver the grain as soon as possible. However, if there are indications that market prices may improve later on, the purchase of a "long futures contract" will capture the benefit of any impeding rise in the market. This strategy is referred to as "business speculation". When a producer exchanges a cash grain position for a "paper grain" position. A business speculation strategy provides cash from the delivery and sale of grain, while retaining the ability to capture rising prices, should prices move up after the grain is sold.

Futures options contracts can also be used to reduce the risk of prices going up after the grain has been delivered. A "Call Option" give the producer the right to by a "long" futures contract, with less risk than a long futures position.

Conclusions

A well-planned marketing strategy is not designed to achieve the top price on each sale of grain. It is intended to improve over-all market returns through a planned approach to selling. The success of the strategy will be determined by your year-end profits.

Successful marketing strategies don't happen without a good deal of effort and discipline. The discipline involved will help remove greed, speculation and panic from the pricing decision. By pricing grain according to pre-set marketing strategy and by taking advantage of market tendencies and low basis levels, the producers will attain the goal of higher market returns.

Enrolling in a marketing training course is a good way to begin a strategic plan. Contact your Extension Agrologist for information on courses in your area.