Pulling out of the farm gate with a loaded grain truck, a producer can turn right and go to a local elevator that is posting a price that’s $20 a tonne more for your crop, or you could turn left and go to another elevator that’s paying $20 less.
Which is the best choice?
Reality isn’t always as stark as this, but in general, turning right would be the most profitable move because that elevator is using the basis to attract more grain. In other words, they’re more interested in buying your crop that day, which is why they’re offering a higher cash price.
The other company has a lower basis posted for some reason, perhaps because they’re temporarily squeezed for storage room, or they don’t have any deals on the books for your particular grain and quality.
The basis isn’t a price. It is the difference between a commodity price on the futures market and the local cash (or street) price. It’s not the price, but it is a key marketing signal.
- Read more: Selling your grain at an optional price
The point of this is don’t turn left just because it’s the closest elevator location or the facility you know the best. The best price may be down the road the other direction.
For some farmers, it’s a lesson they’ve gone to school on, incorporating basis in the very centre of their marketing program. But there’s a long way to go before that level of understanding is universal.
Paying attention to basis is among the basic grain marketing tools for making key sales decisions, says Tyler Welygan-Reiling, a partner and grain marketing specialist with Agra Risk Solutions in southern Alberta. Using the full marketing tool box can get a fair bit more complicated, but in talking with clients with a wide range of marketing expertise, he says everyone needs a starting point, and they simply learn as they go.
Agra Risk Solutions, based in Strathmore east of Calgary, has developed this learning-curve service over the past four years.
“Some clients are very experienced at grain marketing and they use us as a sounding board for ideas,” Welygan-Reiling says. “And others are perhaps brand new to the whole idea. They are excellent producers of crops, yet maybe they haven’t done much more than deliver crops to the local elevator. They need a starting point on how to develop a grain marketing plan.”
Even those who think they have learned the basis lesson may have more ground to make up, however. It’s estimated only five to 10 per cent of producers prepare a marketing plan, so education is an important aspect.
Agra Risk Solutions offers services at all marketing levels, but Welygan-Reiling is certainly glad to guide producers through a proverbial crawl/walk/run pace as they find their marketing legs. He doesn’t have a direct farm background himself, but has developed business skills over the years with a keen understanding of how commodity markets work. A long-time associate of Agra Risk Solutions founder Greg Appleyard, he joined the company as one of the managing partners about three years ago. And, by the way, he says he answers to either last name — you don’t have to say it all.
Lay the ground work
Agra Risk Solutions gets all clients started with the fundamentals. They use a simple, intuitive, specifically designed farm management and marketing software program to establish a starting point for clients. It starts at the Agra Risk Solutions office, but producers can later access their files on the software from their home office computer or smartphone.
During the initial round with Agra Risk Solutions, they access aerial imagery of a client’s farmland and map out the various fields, which helps establish the actual acres being cropped. The software will incorporate field and cropping history. A history of yield data from various crops is rolled into the program too.
“One of the most important tools for producers as they approach a marketing plan is to know their true cost of production,” says Welygan-Reiling. Many don’t. The farm is a business. Just because something is paid for doesn’t mean it doesn’t have a cost or a value. “So it is important to establish a true cost of production — include a rental rate for your land, pay yourself a salary or wage, operating costs for machinery, establish the fixed costs of running your farm, and also know your variable costs.” The cost of production can be assigned to different enterprises on the farm — a mixed farming operation, for example — and it can further be refined and applied to specific crops. What is your cost of production for wheat versus canola versus peas or flax?
With the basics in the system, the next step is to determine the crop plan for the year — what do you plan to grow? “Most producers have a pretty good idea heading into crop year what they will be growing,” says Welygan-Reiling. “The crop plan is usually guided by the crop rotation on your farm.”
So with the basics in place, well ahead of the seeding season, think about a marketing plan. You know which fields and the number of acres for each crop you plan to grow, yield data history or past crop insurance records can provide at least a conservative estimate of expected yield, and you know your cost of production or break-even point — the minimum price you need for that crop to cover your cost of production.
Consider your opportunities
What are your marketing options? You can grow the crop and look at the cash price offerings at the elevator as the crop comes off the combine in the fall. You can look at different contracting options such as deferred delivery contracts offered by elevators and grain buyers. And you can pre-price crops on the futures market. Agra Risk Solutions commonly works with the commodities futures market through the Chicago Mercantile Exchange (CME).
As Alberta Agriculture marketing fact sheets describe it simply: “The cash or ‘spot market’ is where actual, physical commodities are bought and sold at a price negotiated between buyer and seller. However, the futures market functions by using legally binding futures contracts, not the actual commodities themselves, which can be bought and sold. These agreements (futures contracts) provide for the delivery of or receipt of a specified amount of a particular commodity during a specified future month. Futures contracts do not involve transfer of ownership of the commodity. Instead, futures contracts involve potential receipt or delivery of the commodity at some future date.”
Hedging or using the futures market can be an important tool for producers to reduce price risk, says Welygan-Reiling. “It’s a learning process, but we’re here to guide people through it. How do you use the futures market? What are the tools available in trading that can be applied to take advantage of rising markets and protect yourself against falling markets? We have one farm client that involves three generations. So you have the grandparents, parents and the young farmers. And they come in and talk about their marketing plan.”
Welygan-Reiling says the basic advice with any grain marketing plan is to have about 10 per cent of the crop sold — locked in at a profitable price — before seeding. Similarly, have about 60 per cent of the crop sold by mid-summer and 75 to 80 per cent sold by the start of harvest — look at the markets and when you see a profitable price lock it in. The remaining 15 to 25 per cent can be left unpriced until after harvest to consider market opportunities at that time.
Learn to manage fear and greed
“It is perhaps human nature to question, should I lock in at this price now? What happens if the market goes higher?” Welygan-Reiling says. “And I always say to people, if you see a profitable price in April lock in 10 per cent of your crop at that point and don’t worry about whether prices go up the next day. You have a profit locked in and you still have 90 per cent of your crop to sell.” The fact is as producers hold out for the hope of a price rally they run the risk of the market turning down — industry estimates show that as many as 85 per cent of farmers sell crop in the bottom third of the market.
With a marketing plan, farmers can usually avoid emergency selling to meet cash-flow requirements. “You can develop a marketing plan to provide cash requirements when you know bills are coming due,” says Welygan-Reiling. “You want to avoid taking a truck load of grain to the elevator today because you have a tractor payment due tomorrow.”
Welygan-Reiling says by knowing your true cost of production and using the range of marketing tools available, producers can develop a proper marketing plan that can optimize returns. “It takes some time and discipline to learn grain marketing techniques, and the final decision still rests with the producer, depending on their specific situation and risk tolerance,” he says. “We can give the producer the silver gun and the silver bullet, but they still have to pull the trigger.”