The Consequences of Paying Too Much At Harvest

Competition is the driving forces that determines a fair and equitable price.  For the most part, your cash price to producers is based on your best resell values.  You determine what you can sell grain for and deduct freight and a reasonable handling margin.  This is considered the fair market value for grain at your elevator.

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When you are making your decisions about prices, the concern is not so much about your ability to do what is right by the producer – local competition will make sure that you are fair.  What you have to be careful of is making sure that you maintain a reasonable handling margin in your price.  This is the area where competition can sometimes get overly aggressive. 

Maintaining a competitive presence in the market is important.  However, you must also realize that you can pay too much for the bushels, whereby it ceases to be profitable.  Buying grain with little or no handling margin does neither you nor the producer any good.  He may get a few extra cents now, but in the long run if your business is not profitable, then you won’t be around to continue to service his needs.  As you contemplate your responsibility in offering fair and competitive prices, you must consider the needs of both parties – what’s fair for the producer and what’s fair for you.  

The way to combat aggressive competition is to focus on the types of services that have real value to producers, like profit-based marketing strategies, quick unloading and prompt payments.  These kinds of things can mean a lot more to a producer than a few more cents on the price.  You should always keep in mind the goal of creating a win/win environment – buying grain in a way that benefits all parties involved.

In case you are not convinced that giving up margin to attract bushels is the wrong way to compete, consider this example:

Let’s say you manage an elevator that handles approximately 1 million bushels of grain each year and your normal handling margin is 10 cents per bushel.  Facing stiff competition in the area, you consider narrowing your handling margin to 7 cents.  Doing this you feel that you could raise the volume of grain handled by 25%. 

But, what if you decided instead to raise your handling margin to 12 cents and focus your efforts on attracting grain through an effective grain origination strategy.  Doing this, you feel that you might lose up to 25% of your business.  What is your result?

Alternative #1 – Lower Margin/Handle More Bushels

1,250,000 bu.  X  0.07  =  $87,500

Alternative #2 – Raise Margin/Handle Fewer Bushels

750,000 bu.  X  0.12  =  $90,000

Clearly you make more money handling fewer bushels at a wider margin.  The benefits are not only realized in terms of added income, but also in reduced expenses.  You spend less money handling fewer bushels and save a lot of wear-and-tear on your equipment.

Fighting with the competition to get every bushel is not always best for your business.  In fact, it’s sometimes better to let bushels go down the road than to pay an unreasonable (and unprofitable) price.

To hear more on this topic, especially in regards to harvest season, take a few minutes to listen to this episode of The Elevator's Cut, where Roger and Jason discuss Harvest Marketing Alternatives.

Topics: Grain Merchandising, Harvest