Farmers require two things from grain elevators to be able to market their crops successfully. They need access to the market and the means to capture profitable sales opportunities when they occur. Positive marketing services are those that address these needs in a way that provide producers with consistent and lasting results. We consider positive marketing services to be those that encourage a proactive, profit-oriented approach to marketing.
There are many types of marketing alternatives; but, they are not all the same in terms of their value to the producer's marketing efforts. They vary in their methods, benefits, costs and risks. Positive marketing services are selective and focus on two things:
1) Making available fair and competitive prices for an array of forward delivery periods.
2) Offering a few good marketing alternatives that provide the producer with the means to sell their crops profitably with the least cost and risk.
It is not necessary - nor is it wise - to offer producers every possible method of selling their grain (there are a lot of crazy contracts out there). You want to focus instead on promoting the marketing alternatives that are proven to be beneficial to their selling efforts while at the same time are favorable to your merchandising goals. It is very important that you structure your marketing program in a way that is a win-win for you and the customer. By doing so you will insure that both the farmer and you enjoy consistent and long-term success.
Fundamentals of Grain Marketing
In many ways, farmers' marketing opportunities are guided by when they make the decision to sell their grain. Therefore, there are basically three marketing periods: before harvest, during harvest and after harvest. Each of these marketing periods present different opportunities and challenges when it comes to selling grain.
The months that precede harvest are a time of uncertainty. The crop is in its early stages of growth (or perhaps not even planted) and there is a lot of speculation as to what the size and condition of the crop will turn out to be. Weather scares, international news and a number of other factors create volatility in the marketplace. This is all good for marketing because the speculation and uncertainty of the market can move prices to very attractive levels.
The prices that occur before harvest can be some of the best opportunities farmers have to sell. In addition, having the opportunity to forward price their crops at profitable levels give producers the ability to turn their grain into money as soon as the bushels are harvested and avoids additional marketing costs.
The primary obstacle related to marketing before harvest is the risk of production. Yields can vary with growing conditions and farmers never know the exact amount of bushels they will have available to deliver each season. This adds a level of risk to selling ahead of harvest; however, there are ways to overcome these obstacles. Many farmers purchase crop insurance which helps to cover some of the production risks. There are also marketing alternatives that can give the producer more flexibility in the terms of delivery. We believe that the marketing options that are best suited for this time period are Target Contracts and Forward Contracts.
Harvest is the time when uncertainty turns into reality. The size and condition of the crop becomes a known factor and the risks related to production are no longer an issue. However, once the bushels move out of the field there are other factors to consider- mainly, the cost of owning the crop and the risk of declining prices.
The benefit of selling grain at harvest (if it hasn't been pre-sold) is to turn grain into money and avoid the additional costs and risks that can take away from the value of the crop. The obstacle to selling at harvest is that prices are not always at profitable levels. When prices are low farmers are reluctant to sell and would rather take the risk of owning grain in hopes of getting a higher price later. The challenge in this situation is finding a way to remain open to the opportunity for higher prices, without the added risks, and to do so for the least cost.
The period after harvest is perhaps the most negative part of the marketing cycle. While it is still possible to sell grain profitably during this period, the costs and risks associated with marketing are greatly increased, making it more difficult to achieve a positive outcome.
The costs to the producer to own grain past harvest are twofold. First, there is some form of storage or price later marketing fee that is charged by the elevator. If the farmer is storing grain in his own bins, there are storage costs related to the upkeep of the grain.
The second cost to the producer is the cost of interest, as a result of not turning grain into money. This is a real cost that affects all producers. Those who have outstanding loans continue to pay interest; those without marketing loans lose the opportunity to earn interest by not having the money in the bank, an opportunity cost.
The producer also has price risk to consider. Holding grain past harvest provides no guarantee of a better price, as there is just as good of a chance that prices will decline after harvest (which they often do). The combination of downside price risk and the costs associated with carrying grain makes marketing in the post-harvest period very difficult. We believe that the marketing alternative best suited for this time period is the Minimum Price Contract.
Grain Marketing Objectives
The essence of positive grain marketing is to take advantage of opportunities that occur prior to harvest to lock in sales at profitable levels. If the market doesn't present the opportunity to sell ahead profitably, then the objective is to turn grain into money at harvest and avoid the additional costs and risks that come with owning grain after harvest. These objectives are achieved through the use of various marketing alternatives. For example, pre-harvest alternatives focus on forward selling capabilities. Harvest alternatives are structured to turn grain into money. Post-harvest alternatives are based on delaying the pricing decision.
For the grain elevator, your menu of positive marketing services should include some alternatives for each marketing period. The goal is to provide a selection of alternatives that will best enable producers to capture the opportunities and manage the risks inherent to each period- with the main focus directed toward selling at a profit.
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Topics: Farmer Marketing