Grains Research and Development

Date: 20.01.2014

Reducing the stress of grain marketing

Author: ORM Communications

Photo of silo silhouettes

PHOTO: Paul Jones

Making grain marketing decisions can be stressful for many growers.

“The decisions are rarely easy; however, breaking the process into three critical areas can really help lift your confidence,” says Brad Knight of GeoCommodities.

Mr Knight suggests using a decision-making framework to help clarify and improve your approach to grain marketing. “The framework is based on the simple premise that there are factors within a grower’s control and factors outside their control.”

Graphic showing the different stages of the grain marketing pyramid

Figure 1 The grain marketing pyramid – a framework for making effective grain marketing decisions

The three areas in the framework (Figure 1) are:

  • internal structure;
  • planning; and
  • actions.

Each level relies on the one below. It is not surprising that the tip of the pyramid is where a lot of energy and attention is focused. However, the planning and internal structure areas are critical for putting in place the right actions.

 

Internal structure

“The best way to prepare for the future is to take care of the present.” – Anon

Mr Knight says that clearly understanding and monitoring the factors that can be managed within a farm business is important for building a solid foundation for the framework. “Understanding these internal factors gives context to the overall marketing strategy. They also guide the development of plans to deal with uncontrollable factors outside the business.”

Some of the internal factors relate to the individual skills and knowledge of the people involved in the farm business. Each person is likely to vary in their risk attitude and comfort level, so marketing plans and strategies should be designed to match these. Mr Knight says the cost-benefit of engaging an external adviser to fill any skill gaps should be considered here. Grain marketing plans also need to be in line with the overarching goals and limitations of the farm business.


Grower scenario

A Wimmera farming family reflected on their risk profile and the future direction of their business when developing their marketing strategy. The 2000-hectare farm business produces about 5000 tonnes of grain annually and supports two generations (Figure 3). It has a strong equity level, at 84 per cent, and is predominantly reliant on the grain enterprise for cash flow.

In the past, the family sold grain into pools and the cash market because of limited on-farm storage. This strategy was creating some anxiety and tension at harvest time.

They decided to look into alternative marketing tools that would align with their business succession plan.

The personalities and risk profiles of the family members played an important role in the direction they took. While they were confident in their workforce and ability to farm, they wanted to improve their knowledge and understanding of derivatives and forward-selling options before using them.

Consequently, the family decided to increase their on-farm storage in the short term to provide more control and flexibility to sell their grain strategically through the year.

This suited their internal structure and risk attitude and allowed one son to be ultimately responsible for carrying out the grain marketing actions.

Silo bags were identified as the ideal option to increase storage capacity because they required less capital investment than silos. The business would then have the capital available for future expansion and growth strategies, in line with the succession plan.

The family decided to hold a whole-team meeting pre-harvest and again prior to seeding to review the strategy. One of their key lessons was to look at their individual risk profiles as well as the internal structures of the business. This resulted in the development of a marketing strategy the family was comfortable with and that would meet the goals of the business going into the future.

The grain marketing tasks should then be delegated within the business in a manner that ensures they align with the marketing plans. In other words, Mr Knight says everyone in the business needs to be clear about who is responsible for carrying out the different tasks and when.

He also notes the importance of all those involved having a strong grasp of the financial status of the business, including cash flow, budgets and equity position because these all impact on grain marketing plans. These are the factors that help the business to determine its position and/or hedge limits. This position will also be guided by people’s familiarity and comfort with the marketing tools being used.

 

Planning

“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.” – Marcus Aurelius

The planning area of the framework deals with external factors that can affect a business’s grain marketing plan. Mr Knight explains that while external factors are outside a grower’s control, plans can still be put in place to help manage these.

He notes that the first critical step is to analyse market information for its relevance to the farm business. Determining relevance can be difficult and Mr Knight suggests growers look at the timeframe in which the information has an actual influence on the market. “For example, information about world climate fluctuations is relevant over the medium term.

However, forecasts about physical trades and futures in the local market are usually only of short-term relevance.”

Where it becomes more complex is when certain ‘timeframes of influence’ overlap across days, weeks and months. In some instances, the drivers may even have competing influence on the market. Common sources and drivers of market information and their approximate timeframes of influence are outlined in Figure 2.

Mr Knight recommends you have in place plans to deal with the inherent risks involved in grain marketing, such as:

  • incorrect or misinterpreted market intelligence;
  • production or market-related events that make other market intelligence redundant, for example frost, hail or weather damage that takes the local market by surprise, or political intervention, such as the Russian export ban in 2010;
  • changes in the type and level of risk when grain is sold and prices are fixed, for instance the use of physical grain contracts compared to derivatives such as futures and/or options; and
  • ownership and credit exposure involved in contract execution.

Mr Knight also reminds growers of the importance of using objective criteria when making decisions at the transaction stage, and to avoid relying on subjective criteria such as ‘gut feel’. Some examples of objective criteria are outlined in Table 1.

 

 Objective criteria
Comment
Table 1: Example of objective selling criteria that should be used to assist decision-making.
Price decile above target, such as decile 5.  Adjust decile target depending on how much production risk you have,
i.e. the greater the variation in tonnage to sell, the more risk there is,
so a higher price is required to take on that risk.
Price/grade spreads positive Monitor relative grade and commodity spreads to guide what to sell if different
to long-term averages.
Market view neutral
to bearish
Consider your, and perhaps others’, market view for the duration of the decision timeframe. For example, how quickly do you want to sell – today, next week or next month?
Local market momentum neutral to bearish  What is the order flow in the local market, are there more buyers or sellers?
Cash flow required within 60 days  If cash flow is needed in the short term this must be considered early
so you are not forced into a sale.
Price greater than cost of production The market does not take into account what it costs you to grow the crop,
however over a medium to long-term timeframe cost of production is important.
Last sale more than
60 days ago
If target prices are not being achieved, consider planning to sell some grain regardless. This timeframe can be changed to suit the season.
Graphic showing underlying drivers of the commodities markets and their timeframes of influence

Figure 2 Underlying drivers of the commodities markets and their timeframes of influence.

 

Actions

Once a farm business has a handle on the internal and external factors, the focus moves to the timing and implementation of the grain marketing plan.

“Grain marketing can be improved by building on the foundations of good internal monitoring of all the market influences and solid planning,” Mr Knight says. This helps the business more comfortably deal with expected changes in circumstance.

Consistency and flexibility

The underlying structure of a farm business is generally slow to change and therefore the overall framework for making grain marketing decisions should stay the same from year to year: “Growers need to be consistent in the framework they use to make grain marketing decisions,” Mr Knight says. “The only changes that may need to be made from one year to the next are plans that deal with external influences.”

Graphic tree showing family members involved and financially supported by the farm business

Figure 3 Family members involved in, and financially supported by, the farm business (ages in brackets).

That said, if the underlying business structure does change quickly, such as a large expansion in farm scale, then the framework would clearly need to be reassessed to ensure the marketing plan and business plan remained in sync.

More information:

Brad Knight,
0429 802 538,

bknight@geocommodities.com.au

Brad Knight has 10 years’ experience in grain marketing with a primary focus on tailoring market intelligence to suit strategies for large and small grain farms. He is a licenced derivatives adviser and recently established GeoCommodities, providing grain marketing services across southern Australia.

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