EIGHT STEPS TO BETTER MARKETING

COUNTRY GUIDE'S 8 STEPS TO BETTER MARKETING

Maggie Van Camp

Reprinted from Country Guide, October 2009

What do the most successful farmers do that gives them the marketing edge?

Marketing decisions are much like production decisions -- doing many little things right improves yields. But there's no denying the hard facts, some farmers are just better at it.

Even so, they don't think they do anything that other farmers can't do too. On the surface, it seems Ian Lepp from Manitoba markets his crops very differently than Ken Motiuk from Alberta . In part, that's personal preference, but a large part of the reason is because their farms are so different.

Despite the 30-year spread in their ages and despite the equally big differences in their backgrounds, skills, approaches and networks, however, their strategic approach to the market is remarkably similar.

Both are disciplined. Both are effective planners. And both are excellent marketers.

1. SET CLEAR GOALS

"Marketing isn't the act of selling, it's the act of knowing," says Jerry Bouma of Toma and Bouma Management Consultants, Edmonton . "That includes understanding the markets -- and your own strategies."

It's a mouthful, but the pros say it's realistic.

Setting acceptable prices may not be easy and it may not seem like fun. But don't tell that to Frank Backx from Hensall District Co-operative in southwestern Ontario . He doesn't listen to excuses. Says Backx: "Target prices are absolutely critical to success.

"Markets may not always go there, but with the type of volatility lately, most reasonable targets have been getting hit," says Backx, who suggests setting forward contract objectives, such as 10 and then 20 per cent over a conservative cost of production.

Mark Lepp, owner of FarmLink Marketing Solutions in Winnipeg , says a marketing plan is imperative for long-term success. "The most successful marketers we encounter have a very in-depth knowledge of their farming operation," Lepp says. "That includes all of the internal dynamics of it and how each relates to the commodity markets they're selling into."

FarmLink writes marketing plans for its farm clients based on each crop's cost of production, break-even price level and storage constraints, plus the farm's cash flow needs, personal risk tolerance, profit margin targets and other long-term business goals.

In contrast to the roller-coaster nature of commodity markets, the key issues that any individual farmer faces are usually quite static, Lepp says. That makes it possible to manage, review and revise strategies as market conditions change, ensuring the smartest decisions for the business.

Sellers who have goals for the year and a marketing plan have a real advantage, says Linda Feltz, purchasing manager for Wallenstein Feed and Supply Ltd., a feed mill north of Guelph, Ont. "They know what their costs are" Feltz says. "They've pencilled out their costs and when corn hits a certain price, they execute."

Budget-based selling

Ken Motiuk grows almost 6,000 acres of field peas, canola and CPS and HR wheat at Mundare, Alta., an hour east of Edmonton . At 55, Motiuk is starting to think about retirement -- he even has a pact with his wife to go on holidays every winter -- and he's preparing the farm for succession by expanding and by training his son-in-law Justin.

The key to Motiuk's marketing is discipline.

"First of all, you need a good plan of what you're doing, where you're going and how you're going to structure this thing," says Motiuk. His business plan lays out the farm's structure and defines its principles of operation, including succession, labour strategies and business targets. Also rising out of that business plan are the numbers -- including one-, two-and three-year expense budgets.

Based on these expense budgets, Motiuk knows his break-even numbers and his cash flow needs for the year. "We live very much by our budgets," Motiuk says. "As marketing opportunities come in that meet the budget, I'll start to sell."

Motiuk learned about market options while attaining his bachelor of science in agricultural economics from the University of Alberta , but he focuses on keeping current, and he invests in market watching. "I spend a lot of time reading newsletters and keeping up with the market," says Motiuk.

He subscribes to the daily Pro Market newsletter that he reads on his BlackBerry. "Whether I'm on the golf course, in Peru or on the tractor, I can get that newsletter every day," Motiuk says.

Business plan drives marketing

Ian Lepp farms about 5,000 acres at Elm Creek, Man. with his father Harry, brother Daniel and uncle Bill. It's a diversified cropping operation. This year, they seeded six crops -- spring and winter wheat, canola, soybeans, oats and perennial ryegrass -- and in other years they've planted corn and sunflowers.

The Lepps created their own business and marketing plan, and with the help of a farm financial adviser developed a succession plan for the operation. Because the farm is in the midst of transitioning between generations, it looks closely at debt-to-equity and current ratios.

In order to meet their goals for these ratios and for the overall business, the Lepps' marketing plan includes profit targets.

"You want to see your business improve, so we try to use some benchmarks and ratios," says Lepp, who just turned 26. "Having hard numbers helps you set goals so you're not just throwing numbers around."

Lepp writes down cost breakdowns for each crop a year ahead. He starts with the more stable fixed costs and then tries to budget for some changes in variable costs, a big challenge in 2009.

After he calculates their break-even points, Lepp decides how much margin to build into the target selling price.

The overriding objective of Lepp's marketing strategy is to lock in profit when the opportunity arises. He may not always get the top price for their crops but it gives him a solid foundation to plan with certainty.

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2. SELL IN INCREMENTS

"While there's no foolproof system, I strongly believe incremental selling has helped those producers who employ it," says Frank Backx from Hensall District Co-operative in southwestern Ontario . It elevates the average price because sales generally will be done on rallies in the market, not into declining markets.

Backx suggests breaking the crop into a minimum of five increments, with each increment roughly the same size. Then, depending on market prices versus cost of production, he recommends forward selling one to three increments and waiting to price the balance later depending on market conditions.

Whatever the value of the proportions, with at least 24 months to market a crop usually some good opportunities present themselves, says Backx. "The main skill needed is discipline and having the confidence to pull the trigger when price objectives are met."

Part of that is understanding the seasonality of the grain market. "Uncertainty breeds higher prices," says Backx. "Look for pricing opportunities in these windows." For example, markets react to seeding conditions, drought and frost.

However, if seasonal price rallies don't occur, you may need to revise your target prices. "Marketing plans must be adjustable," say Backx. "And they must be written down; otherwise it is too easy to change it without enough thought."

"Bottom line," says Backx, "incremental selling takes some of the guesswork out of a very tough job."

In market 10 to 20 times

For canola and peas, Motiuk breaks his selling volumes into five to 10 per cent increments. By January, he has pre-sold about half of his expected canola yield for delivery right off the combine, and 25 to 50 per cent of his expected peas.

"The pea market is slowly maturing," Motiuk says. "With peas you have to be careful (not to miss a pricing window) because the opportunities come and go." The companies will call sporadically, depending on their sales, and there's no futures market.

Proportional selling

Ian Lepp calls it proportional selling. "We manage our risk by averaging the price we get over a year," Lepp says. He tries to pre-sell a portion of the crop for delivery off the combine, so they don't get hit with poorer basis at harvest.

For their marketing plan this year, they pre-sold 50 per cent of their cereals, but less on canola and soybeans due to frost risks. "Although we'll sell up to 50 per cent of expected production before harvest some years, often we'll sell less on some crops," says Lepp. "Especially this year, for weather reasons."

This year before seeding, they had about 25 per cent of the crop priced. Once it was in the ground, they had sold 50 per cent, Lepp adds. "It seems that in June or July we get a weather rally and we try to sell into those times of the year."

Lepp takes into account cash flow and storage issues when deciding how much and when to cash sell and pre-book.

Once in the bin, sales depend on cash flow needs, he says. "Sometimes we'll try to sell it three or four months ahead to take advantage of the carry in the futures and basis market.

"Usually we have a lot of it moved out by the next harvest but we've had some crop in the bins for a year and a half, if we're in the middle of a rally." Normally, they try to limit storage time to limit the risk of spoilage.

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3. KNOW THE TOOLS THAT ARE RIGHT FOR YOU

Which marketing tools are right for you? There's no one answer, the pros say. Instead, it all depends on your objectives plus your cash flow needs and your debt-to-equity position.

For example, if it's critical to protect a price level in order to pay off an operating line, then your best choice may be to lock in a portion of your crop at a break-even futures price, says Al Mussell, senior research associate at the George Morris Centre. "It's an insurance against your margin."

However, if you're in a higher equity position, you may want to buy a call option on the same crop to keep the door open to upswings in market price. "Hedge a proportion during the growing season depending on how the crop is progressing, or for corn you might make gains timing around U. S. farm program announcement," says Mussell. "Once the crop is in the bin you can hedge it all."

However, Frank Backx from Hensall Co-op urges caution. He recommends flat price sales only. "Don't try to get too cute, it only complicates the job," Backx says. "Targetprice selling and deferred shipment sales should be the only tools needed."

Backx works with a couple of farmers who sold up to 80 per cent of their crop insurance yields a year ago and sold two to three crop years. For wheat, in particular, they locked in at about $7 per bushel for the crop they'll harvest next year and the year after. It's a price most farmers can only dream about now.

Backx doesn't recommend speculating on the futures market. Simply put, he doesn't know anyone who has had long-term success at this. "It's like people who go to the racetrack or casino," Backx says. "The more you go there, the poorer you will be."

"Hit singles all day long"

For canola and peas, Motiuk contacts companies and pre-sells at a fixed price for a set delivery date.

"Pricing opportunities come and go," says Motiuk. "With canola, you balance it over the market but peas you have to be careful." He's referring to the lack of a futures market and pea buyers.

The remainder of the crop he sells during the fall and winter, looking for upsides to the market. He tries to sell all the peas and canola before seeding the next crop.

Since Motiuk is in a stronger equity position, he can cover his cash flow needs early and then try to capture some of the upside of the market for the rest of the crop year. It's a more conservative approach but at this point he's got more to lose.

"I don't have to swing for the fence anymore," says Motiuk. "I just hit singles all day long."

The change in his business and personal goals has affected how he goes to market too. When he was younger and building the farm, he was a more aggressive marketer. He also used producer cars. By doing his own loading and shipping, he traded his time for cheaper rates. He no longer loads producer cars, but still believes in them. "They're a great option," he says.

Starting with cash markets

Even though it's tempting to speculate, using futures should be no different than locking in a cash price, Lepp says.

Lepp's basic strategy locks in a proportion of each crop yet keeps the flexibility to sell on cash markets. In the last year, the Lepps have done mostly cash sales, and Lepp says he's taking on more cash market risk due to volatility in the market.

In the past, Lepp has bought and sold futures contracts, if basis levels are poor at the time. "But I'm always careful just to hedge what we produce," he says.

Underpinning it all is a commitment to keep up to date. Lepp has an agricultural business degree from the University of Manitoba . "We try to take as many seminars on marketing as possible," he says.

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4. KNOW WHO'S BUYING

Many growers make it a routine. They always sell to the same short list of favoured third parties, such as brokers, local dealers or elevators.

"Understanding who actually uses the commodity and identifying the actual buyers is a critical piece of market information," says Jerry Bouma of Toma and Bouma Management Consultants, Edmonton .

Then, you need to determine how best to sell directly to that buyer.

"It's critical for someone to know their customer, and the customer's customer," agrees the George Morris Centre's Al Mussell. "If you become known to the customer as someone with good stuff who is easy to deal with and delivers quality on time, you're successful at marketing."

Mussell says he knows a hog farmer who is always talking to buyers at Maple Leaf and always has pigs available for shipping on Sunday afternoon. The processing plants usually run short on Monday morning slaughter, so this keen can-do marketer fills that void with some of his best finished hogs.

"Top marketers have an attitude, a fundamental mindset, of asking 'what can I do to help my customer?'" says Mussell.

Direct sales can eliminate extra charges, including commissions and handling fees that you will pay otherwise. In regions dense with livestock operations, many crop marketers sell directly to feed mills.

"The farmers who take advantage of opportunities are the most effective marketers," says Linda Feltz, of Wallenstein Feed and Supply near Guelph , Ont.

Since the commodity markets are fluctuating more, it's also more important to continually follow prices and currency values, and to be prepared to act fast.

"Volatility is now the norm, not the exception," says Feltz. "Now if corn moves $0.03 a bushel in a day, it's considered a dull day."

"I'm in the front of the queue"

As a Harper appointee to the Canadian Wheat Board, Motiuk is trying to balance on a very wobbly fence. Personally, he doesn't believe in mandatory selling through the board, but as a board member he's obligated to make decisions that are best for the CWB.

His hope is that the grain-marketing legislation will be changed to include non-board selling as well as maintaining the CWB. He'd like to see the producer payment options expanded, keep the pool price and cash advance program. As a CWB director, Motiuk can't participate in the P.P.O. so he takes the pool price.

"So we're trying to lessen our reliance on the CWB on our farm," says Motiuk. A decade ago, he invested in a few local hog barns and now he custom feeds about 1,000 cattle. Recently, he invested in another internal wheat hedge system -- an ethanol plant which should be operating By Next Year.

"By being an investor, when we get a wreck, I'm in the front of the queue to sell to these hog and cattle operations," says Motiuk. "We've just ensured ourselves access to a market."

"Know what they want"

Even though the quality was good last year, the Lepps sold over a third of their winter wheat as feed. They found markets locally that were above pool price. Their area in Manitoba is intense with livestock and feed mills that import U. S. corn, so feed grain prices run a little higher.

Whether it's to a feed mill, elevator or directly to a livestock farmer, the Lepps send samples first to ensure they're meeting their customers' needs and specs. And they always keep open communications, Lepp says. "Most often, they'll have certain needs and let you know what they want before you deliver."

In the past, they've sold corn and feed wheat directly to local dairy operations, generally via a cash sale. "Usually, we agree on a price by talking to a couple traders first to see what the going price should be and then see if it's satisfactory for both parties," says Lepp. They receive a little premium because it would cost the dairies more to bring the feed from elsewhere, plus the Lepps don't get charged dockage.

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5. COMMUNICATE WITH CUSTOMERS

Communicating regularly with buyers will make it easier when you go to sell. "Guys will call me, via cellphones, from the combine," says Linda Feltz from Wallenstein Feed and Supply near Guelph , Ont.

Farmers who make a point of keeping connected to market information and buyers seem to come out ahead. They know their cost of production and market information. Before they call the buyer, they know the price they want. Willpower, patience, confidence and a little tenacity go a long way.

Feltz says she likes dealing with farmers who watch the market and sell based on a price decided beforehand. "Those guys watch the board and if they come in at lunchtime and corn is up $0.30, they're going to make the call," she says. "The other ones say I'll call later and by 2 p.m. the market is down $0.30."

They follow price movements on the commodity exchanges and they act on market intelligence. Feltz says she can tell when a popular newsletter advises a sell position; she's inundated with calls.

BlackBerry at the ready

Motiuk is in constant contact with the merchants at two local elevators and has a group of buyers for his canola and peas. They know what he has and what price he wants.

Instead of using call options, he stays in touch with the market daily and contacts buyers when cash prices meet his targets. He takes his BlackBerry wherever he goes -- even on holidays with his wife.

"Having this (mobile connection) allows us to travel as much as we do," Motiuk says. "I can know what's going on with the markets even when I'm far away."

"Everything is by e-mail," Motiuk adds. "That's the quickest."

Half sold before seeding

At 26 years old, Ian Lepp is part of the e-generation, used to quick, immediate, continual feedback and communications. So it's no surprise that this is exactly how he markets -- sending and receiving price offers by text-messaging, e-mail and cellphone.

Lepp says today's electronic communications tools makes cash pricing much more effective. For example, Bunge or Viterra who bought a nearby crushing plant have their daily cash price posted on the Internet. "They're pretty transparent with their prices," Lepp says.

More demand from elevators, processors and livestock industry for his crops hasn't hurt either. "If a buyer has a premium, they're eager to tell you," he says.

All the Lepps work at marketing. Sometimes three heads are better than one -- especially with six ears glued to cellphones. Connected together, they're able to sell to many grain companies, processors, feed mills and directly to livestock farmers.

"On my BlackBerry, I get prices daily from various different locations," says Lepp.

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6. INTEGRATE ON-FARM STORAGE

Farm storage is a marketing tool. If it's integrated into your marketing plan, it can increase net returns. If abused, it only adds cost.

"On-farm storage allows farmers to separate delivery decisions from pricing decisions," says Charlie Pearson, market analyst for Alberta Agriculture and Rural Development. "It also allows farmers to make delivery and pricing decisions throughout the year."

That said, Pearson recommends farmers keep a wider perspective in mind. "The need for storage is not only for pricing," he says. "It's for meeting customer needs."

This is one of the reasons why storage can pay. For instance, at Ontario 's Hensall Co-operative this August you could lock in 50 cents to store old-crop wheat for shipment in early 2010, and traders were bidding 25 cents carry on old-crop corn for shipment two months out.

The reason? The trade needs to supply a market that eats all year long.

With the increase in processing plants, more farmers are selling directly to ethanol plants, oilseed-crushing companies, flour mills and feedlots, among others. "These facilities don't necessarily want all their grain needs at harvest," says Pearson.

Identity-preserved markets have also changed the need and requirement for on-farm storage. Better bins, more monitoring, cleanliness in and around storage facilities, identification and more discipline are needed during unloading and loading if you're storing IP crops.

Issues such as variety declarations and GMO separation, paper trails, stringent cleaning procedures, insecticide storage treatments limited to certain bins, and crop identification and security from tampering and stealing may become more important to your marketing plan in the future.

Depending on the system, it costs north of $2 per bushel to build new storage. You must consider depreciation and interest for this fixed cost. Some farmers instead of building, look for local storage structures or renting storage space.

"I'm not going to sit"

Ken Motiuk doesn't like to sit on crop too long. "When it hits $9.50 for canola and that meets my budget, I'm not going to wait for $10.50," he says.

"I'm not going to sit here carrying inventory," says Motiuk. "After all, cash flow is king." He tries to sell all his canola by April. "It's too volatile in the bins."

The duration Motiuk is forced to carry wheat goes against his marketing plan. "We sell a lot of wheat in April, May, June, July and until then it's bin filler," says Motiuk. "I wouldn't grow wheat if I didn't have to rotate a cereal."

Motiuk has on-farm storage for a whole crop so normally they rent out the space to neighbours. Every year, they've put up another bin so they could slowly absorb these fixed costs.

"With one turn a year you just can't justify putting legs under them," Motiuk says. "As we get bigger, I'm considering bagging some grain."

"It just gives you options"

The Lepps own an old Pool elevator and have on-farm storage for about 260,000 bushels. Most years, that's enough room with some carry-over, but sometimes they'll use temporary storage for their oats.

"Those systems load and unload quickly," says Ian.

Having their own elevator makes it more practical to load producer cars. Lately they haven't done it because premiums from local elevators have been similar to the $5-to $15-per-tonne savings of sending producer cars to the coast. Moreover, there's less risk selling it locally, since you don't know what your grade is until it gets to port. "It just gives you options," says Lepp.

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7. LOOK FOR LOGISTICAL EFFICIENCIES

The Lepps own one semi with a Super B and usually rent a truck and two trailers during harvest. Ian says it's essential first to calculate what it costs them per kilometre per tonne. This benchmark allows them to check with local trucking companies to see if they can haul cheaper.

"If we're looking at prices an hour or more away, we call some trucking companies," Lepp says. "Our grain broker deals with them quite a bit and it takes him one phone call."

For bulk commodities, haulage is a major component of net revenues for both the buyer and seller. Top marketers are always looking for savings in trucking and timely delivery.

Trucking efficiency is key in the feed business. Linda Feltz sources feed grains for Wallenstein Feed, north of Guelph , Ont. Feltz says feed mills base their buying price on the market with trucking on top. Sometimes, though, there may be back-haul savings. For example, a livestock farmer who produces surplus corn will arrange for pickup after a load of feed has been dropped off at the barn.

However, a back-haul opportunity doesn't always pay. "If a feed truck is stuck loading corn for too long, it's not out delivering feed and that's where we make money," says Feltz.

If a sucker truck is needed or an auger is only six inch, it increases load time. The driveway to the on-farm storage should be gravelled or paved and trees cut back, says Feltz. Trucks need a convenient place to load and turn around too.

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8. GET CONNECTED BY NETWORKING

A well-developed network of fellow producers, brokers and advisers with an interest in your success is invaluable in lending inside knowledge. But it doesn't just happen.

Allan Johnston, owner-operator of Johnston 's Grain, produces a daily newsletter with quotes for everything from peas and lentils to feed wheat. He says that farmers who use brokerage services benefit by exposure to opportunities. "The reason is that it gives them so many options they could never get on their own."

"A grower needs someone they can trust, with extensive knowledge of pricing and marketing strategies, someone who truly cares about the success of the farm," adds Mark Lepp, owner of FarmLink Marketing Solutions in Manitoba . "Most successful marketers are good managers of their time and realize that marketing takes time."

To market efficiently, they use advisers and brokerage companies to filter through the myriad of market information. Those sources should be independent, unbiased, knowledgeable professionals who understand farming as well as the commercial grain trade and advocate for all types of crops.

An effective network also gives moral support and validates your decisions. "Marketing is a tough job because you can judge yourself every day, whether you made a good or bad decision," says Frank Backx from Hensall Co-op in southwestern Ontario .

Another consideration that seems to help is for the spouse to be involved in marketing. Often, it helps formalize your thinking. "They seem to have an easier time pulling the trigger," says Backx. "Two heads are better than one, when it comes to marketing."

"The single most important trait all good marketers have is insatiable curiosity," says Jerry Bouma of Toma and Bouma Management Consultants, Edmonton . "Look to learn, challenge what you know and don't assume that you know, it's likely changed."

Market conditions are constantly changing, Bouma says, and the successful marketer responds in three ways, by identifying good sources of information, by using good advisers -- both professional and personal, and by learning everything they can about the markets they're selling into.

Where you get that information may vary per crop. For example, keeping abreast of developments in Brazil , a major supplier with an expanding low-cost production base, is critical to understanding soybean markets. Given corn's importance in the U. S. farm economy, U.S. farm policy is a significant determinant of supplies and ultimately price.

Elite marketers continually ask questions, read about the markets and learn how to apply information to their farm. Their marketing strategies change as they learn more options and opportunities.

The George Morris Centre offers several courses on marketing, including a long-standing course about futures and options. For commodity sellers, the key is to put discipline in the process. That's why top marketers take courses on different ways to set selling price, so the psychological position is replaced with a technical analysis.

"It's not about learning if the price will go up or down," says one of the teachers of the GMC course, Al Mussell. "It's a pragmatic answer to what will I do if the price goes beyond a certain level."

Be sure to talk to other farmers

Having a network of buyers is key but so is having a network of other farmers and advisers. "We do business and we socialize," Ken Motiuk says.

Motiuk has built his network through his livestock investments and by going to farm meetings, and also via his involvement on many boards and provincial institutions. In addition to being a director on the CWB, he's been on such boards as Western Canadian Wheat Growers Association, United Grain Growers, and then Agricore United. Currently he is a director on the Alberta Credit Union Deposit Guarantee Corporation.

"Our network is made up of people from at least 40 miles away," Motiuk says. Neighbours are too close and in competition for land.

There's a network at home too

It's difficult enough to make a selling decision when it's just one person, but marketing can become even more complicated when more people are involved. Yet as farms grow, more and more farmers have to make more group decisions more often.

Having written goals and targets helps to clarify and justify pricing decisions. "Sometimes it's easier to have three opinions and sometimes it's not," says Lepp. "It can be harder but in the end, we tend to be on the same page."

The preplanning and target setting is even more important with team decisions. "The thing that makes it easier to pull the trigger with any number of people is the planning," says Lepp. "And if you know how it's going to affect your business."

On the positive side, the larger the team, the larger the network of knowledge and support. Each of the Lepps has a network of buyers and altogether they have significant reach that they can add to the advice they get from their brokerage, Ian says. "You call around to make a sale and the next time they'll call you if their looking for product. Slowly over time you get to know more and more people."

-- Maggie Van Camp is an associate editor with Country Guide at Blackstock, Ont.

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