The Marketing Puzzle – for Oct. 11, 2010

A call, a put, a naked writer. At-the-money, in-the-money, out-of-the-money. It s enough to make you think you re locked inside a jigsaw puzzle where none of the pieces fit.

In fact, though, if you go to some online dictionaries of grain marketing terms, you ll find these are a mere handful of the sub-categories listed for just one term, options. Then you ll find there are at least 30 other terms in the lists, many with 10 to 15 sub-definitions of their own.

So how is a farmer to know it all? How are you supposed to understand all the tools and techniques, and on top of that, wade through the overwhelming abundance of information and advice found online, at the elevator and in the coffee shop to find the marketing plan that s right for your farm?

This month, COUNTRY GUIDE asked three very different farms how they solved the marketing puzzle. Each solution is different, but the pieces are similar. Do they fit your farm?

Photo Credit:Paper Moon Photography

As if marketing isn t complex enough already, Ryan and Lauren Maurer have injected two extra complications. Their farm is above average in size, with 11,000 acres based at Grenfell, an hour and a half east of Regina. Plus, they grow and have to market a wide variety of commodities, including grains, pulses, oilseeds and niche spice crops.

You might find we do things a little different from other producers, Ryan says right off the top.

Some might say that s an understatement. Diverse inventory gives us the flexibility to sell at opportune times, Lauren says, using the example of the caraway they held for 10 years waiting for the price to improve. The crop was put into the farm rotation with the understanding it might not move quickly. It s a niche market, she says. It comes in four-or five-year cycles so you have to know you can sit on it a long time.

That may be an extreme, but it points to the couple s commitment to their production and marketing plan. In fact, they believe the success of their farm, Land and Sky Grains Inc., can be attributed in part to having a diversity of crops.

Their success is also due to the fact that they integrate their marketing with their business objectives. We do some marketing for tax reasons, Ryan explains, some according to what we can blend on farm, and we sit on some inventory to wait for pricing.

Ryan and Lauren were recently named Saskatchewan s Outstanding Young Farmers for 2010. It s clear that, while the couple may be relatively young with four children aged six to 13, they are not new to farming. They ve farmed together for 17 years and Ryan with his parents for some years prior to that.

While not all producers have the ability to blend their own products or wait out niche market pricing, the Maurers believe that recent years of good production and strong prices have given all farmers greater opportunities and a little more flexibility in the market.

The Maurers also use four basic rules in developing a marketing plan.

1. Know each field s cost of production.

The couple uses AgMpower, a software program that calculates breakeven levels on a field-by-field basis. Most producers will do their COP crop-by-crop but doing each field allows for more specific management of both crop and field needs, says Lauren. In fact, COP is so important to management and marketing on their farm, the couple is part of a producer group based around the software. They share information and ideas, and each has access to the others programs online, instantly providing a live peer and support group. 2. Assess your cash flow needs.

The Maurer s use call and put options to price themselves or protect themselves. They also use forward selling, but not so much on new crop. Why take an unnecessary risk with a large inventory on hand? Lauren asks. That inventory is a huge marketing advantage, allowing a great deal of flexibility. So is the fact they own 75 per cent of their land, she says. If 70 per cent of our land was rented, I would want to market significantly differently.

3. Evaluate the upside and downside of each commodity.

You have to look at the risk of each specific commodity, Ryan says. And you have to look at the upside potential on crops. For example, if canola appears to be weakening, the Maurer s will probably sell it and hold on to something that shows upward trends.

And how do you know what s trending? To assess current marketing potential, the Maurer s subscribe to four or five daily and weekly newsletters on marketing and use these to check for an overview of the current world supply and demand in various commodities. They also check projection sheets to see future trends, giving them something on which to base rotation changes.

4. Good marketing starts with good agronomy

Good crop rotations ensure productive land, but they also allow the Maurers to find niche commodities that work. You can only afford to dedicate a specific number of acres to certain specialty crops if you want to wait for the price, Ryan says. But they can pay off big. That caraway the couple hung onto tripled in price over the 10 years it sat in inventory. You simply don t see that kind of volatility with other crops.

and sell before the markets peak.

The Maurers are proponents of incremental selling. For example they might sell 20 per cent off the combine, another 20 per cent in January and so on. It is probably a more consistent and more beneficial way to do it, Ryan says. And you have to accept sometimes that s how it s going to be. I ve seeen people beat themselves up because they are continually changing their marketing plan and can t get anywhere.

And while Ryan thinks there s some merit to the criticism that it has led to a generation of farmers that are good producers, but weak marketers, he says The good old Canadian Wheat Board takes some of the guesswork out of it (marketing). Initial prices help cover some cash costs up front and wheat board grains have opportunity in marketing with premiums available on the identity preserved side of things.

The Maurers have taken advantage of wheat board premiums, with a sale to Warburton of 49 cars of wheat headed to a bakery in the U. K. They ve also sold barley to Canada Malt and Sapporo Brewery in Japan. There s not a huge premium, Ryan says. But you get the base through the CWB and can still extract premiums out of it. The premiums add up over time and bushels.

More than anything, he laughs, it can be done legally.

The couple believes strongly that producers should look to the identity-preserved market and consumer trends for clues as to what to grow because those trends usually equate back to a premium. It s something a lot of producers miss, Ryan says. We don t do due diligence in growing what people are looking for.

Bill Brown agrees with the Maurers focus on integrating production and marketing. The role of agronomy can t be overemphasized, says Brown, an economist in the College of Agriculture at University of Saskatchewan.

While the Maurer s are planning 18 months in advance (there s that big-picture thinking again), Brown says it s more common for farmers to start formally planning rotations about January. Maybe only 20 to 30 per cent of the land can be changed to something else anyway, Brown says. You then look at the cost of production and at what prices are doing.

Once the cropping plan is in place, Brown promotes forward pricing, especially as a way to cover costs. A 10-to 20-thousand acre farm is a hugely risky operation. With 70 per cent of the land rented, for instance, the farm is hugely financially levered. If you pre-price a portion of the crop, you can then concentrate on production.

With large farms, the emphasis is on margin, Brown says. With high risk, they need to be more savvy marketers.

Like the Maurers, Brown views the CWB as alleviating some risk. Producers receive an initial payment for wheat and barley and can plan from there. While you might be able to speculate a little more with lentils or flax, it s critical to know the COP on non-board crops to know the price you need to get out of them. You ve got cash costs anywhere from $70 to $100 per acre depending how fancy the crop is, Brown says. And $100 to $200 non-cash costs.

The hardest part of marketing is forward pricing, Brown says. But you cover your costs and use the rest to take advantage of increased prices. And tell yourself this is what I will be happy with.

While forward pricing is a good tool, Brown believes not more than 25 per cent of all farmers use it. But if you don t price crops until they re in the bin, then you re speculating as much as anybody. There is always the guy at the coffee shop who brags when he sells high, but he s pretty quiet when he sells low.

While more farmers are using forward contracts and some others use options to provide a minimum price guarantee, Brown believes most continue to market through price contracts available at their elevator company.

While he and other analysts seek to reduce risk on the farm through market- ing approaches, Brown admits to some frustration with the inability of farmers to see the benefits of lower risk. He cites a study done many years ago that concludes risk taken out of one area will be incorporated into some other part of the business.

The Gross Revenue Insurance program was one example, Brown says. Farmers took that money and plowed it right back into loans and other higher-risk areas so their overall risk ended up about the same as before.

While the Maurers have never hired out their marketing, there are companies offering marketing information and plans on a fee-for-service basis. Most provide information with very little in the way of recommendations. And much of that information is general.

Ken Evans, farm business management specialist with Saskatchewan Agriculture, says it s imperative to have a marketing plan specific to your farm. FBMC specialists are trying to provide a systematic approach to marketing, Evans says. But we approve farmers to get funding for their farm marketing plans and what happens is they are given only one piece of the pie, which is information.

Integration, ie putting all the pieces together, is what it s all about, he says. We d like to see a holistic approach from the information to interpretation of the information and how it impacts a particular farm, right through to recommendations based on that individual farm.

Gilbert Ferr grows 2,500 acres of wheat, barley, oats, canola and peas in the Zenon Park area of northeastern Saskatchewan. His son Nicolas farms with him, much as Gilbert farmed with his own father when he started out in 1974.

Now, with years of experience behind him, Ferr doesn t hesitate when asked what marketing advice he has for younger producers coming into the industry.

Talk to other farmers, Ferr advises. Find out what works for them. Talk to the elevator companies. Subscribe to marketing newsletters. Talk to the Wheat Board. Gather as much information as you possibly can.

Market intelligence, he says, is what producers need. On a daily basis, Ferr and his son make time to discuss what each has heard about events in the grain markets and take stock of opportunities that might be developing. Earlier in the summer, he explains, he and Nicholas began watching the drought in the Black Sea region that limited the availability of barley for the lucrative Middle Eastern market.

This is opening up the possibility for us of selling barley for export at some pretty good values, something that we can t do every year, Ferr says. It s not just a matter of knowing what the basis is at the local elevator or what specials are on. We have to know what the end users are doing and what they re looking for.

Flexibility, Ferr insists, is very important.

You can t know from one year to the next what will make money for you. Sometimes, you have to go against the flow. Look at flax this year. The Triffid scare drove acreage down and now prices are over $11 per bushel.

But flexibility mustn t be mistaken with a lack of planning. On the contrary, Ferr is a firm believer in the budgeting process and spends a good part of his winters looking at cropping options and seeking the advice of experts on what to grow.

My two best friends are my banker and my accountant, Ferr says. I use them as sounding boards for the figures that I come up with. I also make sure to consult with agronomists.

Ferr believes this enables him to prepare budgets that accurately reflect his cost of production. He plugs in amounts that represent high, medium and low scenarios for prices and yields based on his anticipated cropping program, and then he looks for positive contribution margins that is the difference between expected returns and his total fixed and variable costs.

The crops with the highest contribution margin are the ones he will maximize to the extent that his crop rotations will allow. Ferr s soil is his factory, he says. To keep it operating at full capacity, he is very mindful of his rotations and he soil tests regularly.

Producer car loading also helps keep those margins in the black. In the past crop year, we shipped all of our wheat in producer cars along a short-line that was purchased by local producers, including ourselves, a number of years ago, Ferr says.

Photo Credit:Lina Brisco While he works on his budgets throughout the fall and winter, Ferr only finalizes them in spring, in order to reflect the most up-to-date information. Even then, they are not set in stone. Should soil conditions or markets dictate a last-minute change as they did this past spring with the excess rain in Saskatchewan he tries to adjust his plans accordingly.

The increased volatility in agricultural markets, he says, has not substantially altered how he plans to market his crops. He has increased the time and effort he puts towards following the markets but notes that the increased presence of investment funds has made it extremely difficult for producers to read the markets based on fundamentals of supply and demand.

It has also confirmed for him the value of selling throughout the year, one shipment at a time, so as to avoid marketing everything at a specific point when prices may be at their lowest. While this may mean missing some highs as well, it is better than selling everything before a bull market has fully run its course, which is something that happened to a lot of producers, especially those in the U. S., in the fall of 2007.

After all of that is said and done, Ferr says it s critical that his marketing plan help him get what he wants to get out of farming.

I really love what I do, Ferr says. It s the main reason I farm. I have told my son that production agriculture is no get-rich-quick scheme. You have to adapt to circumstances and constantly be on the look-out for opportunities.

New Horizons

When elevator consolidation cut local competition, Leon Ternan decided he need to look further afield

By Rhal Cenerini

On the morning that Country Guide caught up with him, Leon Ternan was heading out to drive combine after he had worked on some bookkeeping and then made time

to read his marketing newsletters. What other profession gives you this kind of variety? Leon

says. Sometimes I am asked why I spend so many hours working, and I respond that I haven t worked a day in my life.

There s a difference, though, between loving what you do and trying to run your farm business as a feel-good, lifestyle operation. It s a difference, Ternan feels, that is crucial to his marketing success.

For Ternan, there is no other sector as exciting as agriculture, and certainly none with as many people filled with as much common sense, logic and goodwill. He beleives it s because everyone from elevator managers and processors to primary producers like himself is involved with the production of food.

It is the intrinsic bond that is common to all of us, Ternan says. It doesn t make us better than others it just sets us apart.

Lest comments like these leave the impression that Ternan is an adherent of the farming-as-a-way-of-life school of thought, it should be pointed out that his farm in the Luseland district close to the Saskatchewan-Alberta border comprises 15,000 acres on which he grows canola, peas, soft white spring wheat, barley, durum and lentils.

The only way to successfully build an effective marketing plan for an operation of this size, he says, is to take the emotion of it.

You can t be emotionally attached to your farm no more than you can be philosophically bound to a certain way of marketing, Ternan says. You have to come at it with an open mind and ask yourself things like: What amount of risk am I comfortable with? What are the products that I can best grow and market with the set of resources land, machinery, labour that I have at my disposal? What are my specific costs and cash flow requirements?

Once producers have a good sense of these big-picture issues, Ternan believes it is imperative to look at ways of structuring the farm s finances so that production is sold where and when the market will pay the most.

As producers, we often have very significant payments to be made in the fall, Ternan explains. Unfortunately, when you sell right off the combine, you are often selling at a time when the market will pay you the least for your production.

Invariably, the only way to avoid having to sell on the basis of cash flow requirements is to have a partner like a financial institu- tion that is able to bridge the gap between when the crop is harvested and eventually sold. It is also important, he believes, that bridge financing like this be sought outside the trade in other words, the buyers who will be eventually bidding for his production. In his mind, the financing that a producer obtains should be independent from marketing considerations.

Name one other major commodity sector that looks for financing from its customers, he says. It doesn t happen.

Ternan prefers to wait until harvest is over before kicking his marketing plan into gear. That way, the quality and the quantity of the crop, including its potential for blending, are known with certainty. This is not to say that he will not sign some forward pricing or production contracts if specific opportunities present themselves. He calls this virtual vertical integration on the part of grain companies. As a whole, however, he prefers to not have his hands tied in this fashion.

Gathering market intelligence is a major preoccupation for Ternan. He turns to market newsletters, market analysts, people in the trade and his broker for information on where markets are headed. He believes it is important to keep in mind, however, that such advice remains the best estimate of the individual providing it. There are no guarantees.

This is especially the case now with an ever-increasing presence of investment funds in the marketplace.

It seems that markets move now even when the fundamentals don t, Ternan says. It could be that, as producers, we must become technical traders to take advantage of some of the pricing opportunities that this has created. There are people involved in commodity markets now who can actually help to move prices in our favour.

What is more of a threat than market volatility, in Ternan s mind, is the ongoing consolidation in the grain-handling and transportation sector. Where there were once six different elevator managers to speak to, he says, there may only be one now. This changes the nature of the conversation that takes place between the producer and the purchaser. Furthermore, he believes the consolidation is far from over. It is a trend that will continue, just like the increase in the size of farms and in the variety of crops that are grown.

We need competition to make our agricultural sector stronger, Ternan says. As producers, if we re faced with loss of competition at the local elevator level, we have to be ready to search out other markets and look at other models.

Examples of this, he says, are groups of producers who have banded together to load producer cars or process their crops and sell them further up the value chain. Ultimately, the Canadian Wheat Board is meant to be a tool that enables grain producers to extend their reach in this way as well.

Marketing means a lot more to Ternan than deciding between basis contracts and cash prices. It is a matter of finding the right structure and enterprise mix to optimize the production that his assets and resources can generate.

Even the sheer size of his operation is in part a response to his focus on marketing, says Ternan. I wanted to make sure my farm was of a sufficient scale to be a player in the industry. CG

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A 10-to 20-thousand acre farm is a hugely risky operation, says Bill Brown. If you pre-price a portion of the crop, you can then concentrate on production.

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