Markets can be overtaken by hype and emotion, says ag economist Al Mussell. The last thing you need is an adviser or broker who injects even more.
Before the frustration sets you storming out the back door, chucking your smart phone into the field and yelling some words that you aren t even supposed to know, start by thinking clearly about what exactly you want.
Some farmers are only looking for market background and outlook information. Or maybe you simply want a broker to make the trade. But then, maybe you could use someone to help you create a complete marketing plan with targets for each commodity.
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Once you know what you want, you can start putting together a list of all the advisers and brokers who say they can deliver on it, says Mussell, who teaches a well-known futures and options course at the George Morris Centre.
Be prepared for it to be a long list, and one that is quickly getting longer. It’s getting longer in the West with pending changes to the CWB, says adviser Mark Lepp of FarmLink Marketing Solutions. And it’s also getting longer in the East, thanks to the energy in today’s markets.
Also be patient. Selecting the right company or person can already be daunting. But it’s a crucial job that will not only drive your business performance, but help you sleep as well.
So get in front of your computer, or pick up the phone, and start asking these. five questions.
1. What Can t You Do?
Market advice comes in myriad shapes, sizes, titles and kinds. There s no one package that s perfect for every farm, but it s essential to know which of the following services your adviser can offer, and which they can t.
Basically, futures brokers, commodities brokers, carrying brokers, clearing brokers, commodity futures brokers and futures commission merchants (FCM) all do the same thing buy and sell futures and options. A broker/FCM is a person or firm registered under the Commodity Futures Act and Securities Commission in each province, meaning they use certain accounting standards and the firm is financially secure.
A FCM submits trades through their firm s trading software or phones the order to the brokerage house order desk. FCMs are regulated by each provincial securities commission and Liz Robertson, executive director of the Canadian Association of Farm Advisers says most work for brokerage firms such as RBC Dominion Securities or ScotiaMcLeod. Says Roberton: These are rare professionals as it is very stressful.
Brokers can also give advice, forecast, prognosticate, and deal with you in the cash commodity, says Mussell.
There are also merchants who connect buyers to sellers. They re not registered to trade on the exchanges but are well connected with buyers. They can also be good sources of market information.
Also at work are single-proprietor market analysts who take third-party analysis and give their recommendations to neighbours and clients, and there are also marketing advisers hired by grain companies to develop marketing plans for their customers.
A marketing plan is essentially a blueprint and reference point for selling commodities, usually developed before the crop goes in the ground. Some take this service a step further and link marketing plans with the farm s financials, including things like ROI, cash flow management, and personal risk tolerance.
With the high commodity prices we re experiencing higher land values, higher fertilizer prices and higher overall risk, says Mark Lepp. As a result, we re seeing more growers looking for help managing the overall risk to their operation.
2. What Types Of Marketing Strategies Do You Prefer?
The marketing plan is really a strategic plan for marketing farm products, says the George Morris Centre s Al Mussell. You need an objective what you want to accomplish.
Then compare your objective not only with what your adviser or broker can do, but likes to do. By stating your goals up front, you both will know whether the fit is right.
Your goals could be to sell at the maximum price or it could be to protect an operating margin or to sell with a plan that lets you sleep at night. Will you measure the success of your plan strictly by whether you achieved a certain price, by whether you hit some percentage of the range in the futures market, or by some other measure?
If this is how you re going to judge your adviser, it s good that they know this up front and that they explain how their strategy meshes with your objectives.
It s not really that technical. It just needs to be thought through logically and pragmatically, says Mussell.
By asking which marketing strategies your broker prefers, you can assess if their approach matches your goals. For example, do they prefer hedging with futures/ options, or forward contracts?
Risk management with hedging is different than trading commodities, says CAFA s Robertson.
Knowing your adviser s preferred strategies will also let you compare them with recent research to see if they are in fact likely to be winners.
Several research projects have questioned the effectiveness of certain market strategies. In 2008, Richard Vyn, associate professor at the Ridgetown Campus of the University of Guelph, ran simulation models for corn and discovered the strategies with the highest average prices across all years incorporated short hedges using futures contracts. These strategies returned prices about 30 cents per bushel more than the baseline strategy of fall cash sales. Vyn s strategies with put options also generated returns nearly as high as those of the futures contracts strategies.
In Vyn s study, however, spreading cash sales through the year didn t result in significantly higher prices than selling off the combine. Any price increases in the months after harvest may be offset by storage and inventory costs. Nor did spreading cash sales out over the year reduce risk, since there is so much year-to-year deviation in the market s seasonal performance. Vyn also concluded that it may be prudent to use different strategies in response to the current set of market conditions.
While you re talking with your adviser, it can also be an ideal time to sniff out if that person knows enough to clearly explain specific trading strategies that you may want to use. For example, Lepp says he s had questions lately about how his company is going to help clients with the potential changes to the wheat market in Western Canada. It s certainly a way to see if the market adviser can help position the farm for any opportunities and threats.
David Clarke from RBC Dominion in London, Ont. recalls during a presentation at a seminar being grilled by a farmer about spreads. One of the attendees asked all kinds of questions: old crop/new crop spread prices, hog/cattle spreads, wheat/corn spreads, Clarke says. Thankfully, I ve made a bit of a hobby out of watching various spread relationships so I was quite comfortable having the conversation with that individual.
Clarke thinks the farmer s strategy was sound, and he suggests asking a question or two about commodity spread relationships. If the candidate can come back with an intelligent response, there s a pretty good chance the adviser knows a thing or two about marketing, Clarke says.
3.What s your track record?
The bottom line for most farmers is that we want to know if the advice was worth paying for. This question mostly relates to where we get growers in the range of prices, says Mark Lepp, & and what our client retention rate is.
Certainly there s a broad range of market success. Long-term research has tended to find that prices achieved by farmers who marketed on their own are similar to farmers who hired a professional market advisory service. Our results show, at best, there was a very small price performance advantage by following advisory services recommendations for marketing soybeans and corn in Illinois from 1995-2004, concluded Scott Irwin and Darrel Good at the University of Illinois, in their research project called AgMAS.
They also found, however, that there was a huge variability in prices recommended by the services, and that it wasn t easy to predict next year s winners based on past results.
The best way to check success and trustworthiness is through referrals. Talk to other farmers, traders, industry professionals and industry organizations. Also check if your adviser has been a member in good standing with well-known industry associations for a substantial time.
Find out what type of skills the broker or adviser has, including their employment and education history, says CAFA s Robertson. Also, don t forget to ask how long the candidate has been involved in trading, and their experience before becoming a broker.
From what I ve seen, the longer in the game, the better the ability to read the markets, says Robertson.
Advisers come from all walks of life. They may have lots of experience in some area of agriculture, such as lending, sales, manufacturing or consulting but not so much in marketing.
Commodity marketing is a very specific sector within the industry, and experience within the sector is extremely valuable, says RBC Dominion s David Clarke.
Brokers and advisers who have dealt with the full spectrum of economic environments and market factors are more likely to direct you to the right action under most circumstances. Additionally, advisers who have survived through various choppy markets tend to have developed a strong appreciation for risk management.
Some people are better connected in certain commodities. For example, a company may suit your farm because you grow a lot of barley and the broker is well connected with the malting and feedlot industries. Or you may want to deal with a person who has considerable local knowledge and experience. Personal contacts in the marketplace often can provide background information that s not otherwise available.
Right or wrong, it seems folks in agriculture feel most comfortable dealing with someone who can talk their language, says Clarke. Brokers with an agricultural background might pick up on a simple error in terminology when speaking with an inexperienced hedger and end up saving some grief.
It s also important to ask exactly who will be doing your analysis and making the sales recommendations. Lepp asks, will it be a team, one person, in-house or third party?
4. How Do You Keep Clients Informed About The Market And Their Accounts?
Whether it s by instant messaging, emails or by picking up the telephone, does the way your adviser wants to communicate with you match how you prefer to be communicated with? There isn t much point getting email alerts if you depend on voice, just as it can be a major nuisance if your broker is always calling you when you prefer updates by smartphone.
This is also an opportunity to find out if your candidate adviser has convenient office hours or cellphone access. If they are hard to get hold of or slow to return your telephone calls or emails, this is probably a bad sign.
Mussell says you should also ask about responsibilities, such as finding out who will implement the plan and who will communicate with lenders.
Knowing who to contact regarding questions about your account statement or disputed orders may save headaches later.
5. What do you charge?
Like most services, costs vary with the amount and types of service. Also, make sure you understand all additional fees for value-added services.
Most newsletter groups charge a flat fee. For market advice only, you can expect to be charged by the acre with usually some minimum and maximum fees or a flat fee. Our two entry-level products are a flat fee per year, and our AdvisorLink and BusinessLink services that are charged by the acre, says Mark Lepp.
We do introduce buyers to our clients and facilitate the sale of their crops but that is part of what we are charging for, says Lepp. We recommend on when to sell plus who to sell to. The final decision is always the farmer s. Brokerage fees for exchange trades are above and beyond these charges.
Commodity brokers make money through commissions. Remember, commission rates on futures contracts are paid per contract, not per order. The only way they can make a commission is if you make a new trade. Some may be tempted to churn, or over-trade accounts. Be wary of any broker charging outside than norm or who recommends you blow all the funds in your account on the first trade.
Always remember, good brokers never pressure clients to trade.
In the 1990s, many commodity brokers were charging in excess of $150 per round-turn. Since about 2005, full-service rates have typically ranged from $80 down to about $30. Transactions done at the Chicago Mercantile Exchange or the International Commodity Exchange are levied in U.S. dollars and ones at Winnipeg Commodity Exchange are evied in Canadian dollars. A round-turn rate covers both the buy and sell sides of a trade. A half-turn rate only covers the buy or sell side of a trade.
Minimum gross income or net worth and a minimum operating line of credit or bank cash deposit is usually required to have a trading account. Minimum size accounts are sometimes required, along with margin requirements and call procedures. Some of these guidelines may be reduced or waived under certain conditions especially for clients who only plan to hedge in their trading accounts.
According to Alberta Agriculture and Rural Development s fact sheet, Choosing a Commodity Broker,( www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis1015), churning an account is giving the broker permission to buy and sell futures and options contracts based on the broker s opinion of the market and with no specific order from the client. The objective is to make a profit for the client but the client, not the brokerage firm, covers any losses.
In some parts of the U.S., option chophouses use churning or rolling the money to generate enormous commissions. They peddle options over futures contracts because commissions are charged up front, no margin calls or deficits are possible, and they can sell more options than futures.
Firms can have different policies regarding margin. Watch out for companies that want you to invest an inordinate amount of money in commodity options. Options require money upfront and not on the back-end, so these companies may want your working capital for themselves right away.CG
