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Opportunities in grain marketing

In a tough market, everyone says “shop your grain around.” But what’s the best way to do that?

With strong grain prices over the past few years, marketing has been relatively easy. Sure, there’s been the perennial question of whether the market will go higher or lower. But finding profitable prices wasn’t exactly searching for a needle in a haystack. As long as they got the yield in the field, profits were largely there for the taking for the astute farm manager.

This season the landscape has shifted. Now, finding a profit is a lot harder, and grain marketers are looking at a few dimes and nickles per bushel making the difference between red and black ink on the balance sheet, says one marketing expert.

David Drozd heads up Winnipeg-based Ag-Chieve Corporation, a grain-marketing advisory firm. He’s telling his farming clients that discipline and knowledge will be the winning tactics this crop year.

That means taking a fresh look at some foundational marketing and management concepts.

The first couple of steps are no surprise. “It’s all going to start with the farmer’s cost of production. They need to know what it actually was,” Drozd says. “Everyone does their estimates before the start of the growing season, but they need to revisit this now, after the season has wrapped up, and figure out what their actual cost of production was. From that, they can then start looking for profitable pricing opportunities.”

The next step is determining exactly what’s in the bin — amounts, grades and other quality factors like protein levels or issues such as fusarium in wheat or green seed in canola. One idea, Drozd says, is to consider contacting your short list of potential buyers and have the grain pre-graded, using a representative harvest sample.

Once you have amassed this knowledge, the marketing game really begins in earnest, and it’s very much a game that’s been evolving over the past couple of decades. During that time grain companies consolidated, they closed elevators and they centralized operations mainly in high-throughput concrete elevators and inland terminals.

The talk has been that farmers were losing market power to these ever-larger grain companies, but it’s also led to an interesting dynamic where there are opportunities throughout the marketing year when the scale of these operations works against the grain companies, providing growers with short-term pricing windows that can prove to be profitable, Drozd says.

For example an elevator agent may suddenly find themselves a few thousand tonnes short of a very specific product required to fill a 100-car unit train that just arrived. This causes them to offer what’s essentially a “same-day-special” to pull this specific grain in very quickly.

“We’re regularly seeing these sorts of offers in the market,” Drozd says. “For example, I’m aware of one situation recently where for a very short period of time, two elevators that were seven miles apart were almost $1 a bushel different in price for wheat.”

Those opportunities crop up because the grain delivery system these days is very much a just-in-time model, where large facilities need to be regularly turned over to ensure profitability, and where trains and boats need to run on time, or charges start to stack up fast. For example, leaving a boat waiting at the Port of Vancouver can run between $15,000 and $25,000 a day, making a few extra cents a bushel to a few farmers pale in comparison.

Frank Letkeman

Says Frank Letkeman: “It’s in markets like this one that you get paid for your market intelligence.”

The challenge for farmers is to identify where opportunities like this may emerge, and then make sure you’re positioned to take advantage of them, says Frank Letkeman, a front-line market adviser for Ag-Chieve with a long career in the grain industry, including a stint as an elevator manager.

“I really do believe that it’s in markets like this one that you get paid for your market intelligence and the knowledge of the market that you gather,” Letkeman says. “Frankly, I think it’s in markets like these where services like ours deliver their best value.”

Letkeman cites one well-known quality attribute that’s going to be in short supply this year — higher-protein wheat. This will likely lead to the emergence of short-term pull pricing at elevators throughout the marketing year. If a grower has some of this grain available, they’re probably going to be best served by letting their list of potential buyers know.

“These pricing opportunities last a very short time, and you need to be in position to take advantage of them,” Letkeman says. “I know from my days as an elevator agent, I had a lot of time constraints, and the first calls would be to the people I knew had the grain I needed.”

That means growers should talk to their short list of buyers and give them some indication of the quality and quantity of grain they have on hand, especially the grades that are likely to be in demand, Drozd says, although he acknowledges that for most farmers it’s a difficult balancing act between providing enough information to potential buyers and too much.

“I think most growers hesitate a bit about how much information to share,” Drozd says.

Another grain-marketing expert echoes that theme. Mike Jubinville of ProFarmer Canada, agrees it’s all a question of positioning yourself to take advantage of such opportunities, and that’s doubly true this season.

“In a year with a wide variety of available grades and protein, it will be helpful to potential buyers to have some idea of where the grain they need will be,” Jubinville says. If the buyers know, Jubinville says, the sellers will find out, and it’s an example of the evolution of the buyer-seller interaction to one where for farmers having a relationship with their buyers becomes very important.

“I can appreciate and understand a farmer’s desire to keep their cards close to their chest,” Jubinville says. “But I think the more information we share, the more the system moves fluidly. That’s becoming more and more important to everyone, companies and farmers included.”

Another strategy Jubinville says some growers might consider is thinking a bit outside the box on marketing and looking for new outlets for their grain. For example, U.S. delivery points might be worth shopping to for growers on the southern Prairies, along with smaller specialty merchandisers who tend to offer better premiums than the big guys.

“But know your merchandiser,” Jubinville cautions. “Feel confident you will get paid on time and feel confident your agreed delivery period will be acted upon.”

Otherwise, Jubinville says the main thing farmers are doing when shopping their grain is looking for a better cash basis opportunity. At times, those chances may come when the futures aren’t as attractive, so some growers may want to separate their basis and futures portions of their marketing.

“This lets you sell the grain for cash, and then reacquire the paper to look for any gain in the futures,” Jubinville says.

There are basically two ways to do this. You can do it yourself, taking a DIY approach and having your broker purchase the paper. Or you can enter into a contract with most grain companies, locking in the basis but deferring pricing the futures portion until a later date.

Ag-Chieve’s Drozd suggests growers also consider any other external factors that might ultimately affect the bottom line, even if they’re not immediately obvious. For example he’s aware of one case where two elevators are close together, but are serviced by different rail lines and one regularly has lower freight rates.

“These are the sort of incremental things marketers need to be looking for in this kind of market,” Drozd says. “We’re not going to be hitting home runs this year. It’s about consistently hitting singles.”

This article was originally published as “Going shopping” in the November 2014 issue of Country Guide

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