On-farm storage investment and grain marketing

Take home messages

• To command more money from your on-farm grain you must provide more value.
• Identify who your customer is. It isn’t necessarily the end user of the grain.
• Understand what your customer values – put yourself in their shoes.
• Market dictates what should be stored on farm at any point in time.

To command more money, you must provide more value

Value comes in many forms and each enterprise values their attributes differently. In most aspects of business, we exchange value in return for money. For example, selling or buying goods (value) in exchange for money, or as a service provider exchanging a service (value) for money. To command more money, we typically need to provide more value, for example; better goods or a higher quality service.

On-farm storage is no different. To extract more money from your grain stored on farm, we need to provide more non-monetary value to the buyer of that grain. For a buyer to pay you more money they in turn need to be getting more value for themselves from the sale of that grain to justify doing so, otherwise they will buy from another source. Maintaining or creating value doesn’t have to involve significant outlay and often doesn’t cost anything at all. This can be achieved by maximising the already inherent value in the grain you produce or simple operational methods that create value that the buyer of your grain values.

Some examples are:

• Maximise the value of the quality you produce:
  • Segregate based on grade and keep running samples and record stack averages.
• Know your competitive advantage:
  • Identify what your local competition lacks. Bulk handlers typically don’t provide flexibility of operation or certainty of quality and service.
• Solve the customers’ problems:
  • Wet weather access, weekend loading, short notice loading, known quality.
• If you do it, do it properly:
  • Create a reputation of meeting/exceeding customers’ expectation. You will get first call when the customer values it.

Who is your customer?

When identifying who your customer is, it is important to consider all types of market participants as your customer; i.e. consumer, trader, packer and stock feeder. Most of these types of participants will have similar drivers and will see value in similar ways. By considering all types of market participants, you aren’t limiting your buyer base. Different participants will be active at different times and for differing reasons, so who is the most competitive buyer on the day for your ‘value offering’ may not be who you initially identified.

What does your customer want?

Each customer has different drivers based on their business’s needs. Each business will place different values on the following four attributes; consistency, efficiency, certainty and price, based on whether they have the capability to compensate for the lack of that attribute. If you, as a supplier considers these when planning and operating on-farm storage, then you will maximise the potential value and appeal to more buyers of grain.

Consistency

Across all industries that handle or consume grain, the common challenge that everyone faces is the requirement to convert an inconsistent, natural, raw ingredient into a consistent homogenous finished product. The end consumer of the finished product is extremely discerning and expects the same consumer experience each time they purchase the product, whether it is a loaf of bread, beer, ethanol for fuel or packet of instant noodles. The sheer volume of raw inputs that grain processors manage also doesn’t lend well to production of consistent end-product. With some facilities processing 1000MT-plus/day, it becomes difficult to adapt processing to manage individual parcels of varying quality.

Extracting value out of consistency - segregating by grade and recording running samples and stack averages

Grain buyers will value a parcel of grain based on the lowest quality they are guaranteed to receive. Any quality value above the minimum is being lost with no one able to capture that quality value unless it is segregated again (bulk handler). Storing by grade will mean that you minimise the range of quality in a parcel, and therefore, maximise the value you receive for the quality that you produce. On occasion, some buyers may value intra-grade quality (i.e. AUH 14 Pro) if it is known when contracting. This will depend on the buyer’s capability to extract value from that quality and whether there are alternative suppliers at the time. This means that recording running samples and knowing the stack average of each segregation is worthwhile.

Efficiency

As with any mature industry, most grain processors are in a margin competitive trading environment. This means that to stay viable, efficiency of their facilities is paramount. This efficiency can come in the form of maximising output of a facility, minimising the amount of handling of raw ingredients, minimising wastage and/or minimising stock on hand (JIT).

Extracting value out of efficiency.

Having the capability and willingness to sell ‘buyers call’ or to load nights/weekends or on short notice can assist a customer to gain efficiencies, and therefore, value. Along with being easy to deal with by providing correct information at delivery and providing weigh dockets on delivery completion, will improve the value you provide, and therefore, the price that you command.

Certainty

Certainty of quality and delivery is desired by the buyer, and therefore, the more certainty you can provide the more value you can extract. All contract terms are legally certain however, being able to narrow terms beyond standard terms gives the buyer something they can rely on to extract value from their efficiency or consistency.

Extracting value out of certainty

Creating a reputation for meeting commitments will give you an edge over other suppliers. Certainty of quality and delivery provides significant value to a customer as they can call in their exact requirements without requiring additional inventory on hand. Buyers also need contingency plans in case of unforeseen supply issues to ensure they can extract value from efficiency. Ensuring your facilities have all-weather access and on short notice, provides value to a buyer.

Price

A buyer isn’t necessarily motivated to buy the cheapest grain available. A buyer is motivated to buy the best ‘value for money’ product for their operation at the time. As a supplier, the more value provided, the more money that buyer is willing to pay for that parcel over a competitor.

Extracting value out of price

It is important that the supplier clearly states the terms that he/she is willing to guarantee the buyer so that the buyer can understand the value that the supplier is providing. If the price quoted isn’t desirable, provide an offer. An offer allows the buyer to fully weigh up the value for money proposition of your parcel, and may help you in reaching your target.

The grain market dictates what should be stored on farm

What grades and/or commodities that are best stored on-farm changes from year to year depending on the crop quality profile, export demand and consumer behaviour. To follow are some points to consider when planning your segregation plan:

• The market typically values what is least plentiful.
• In years of varied quality, certainty of quality is valuable.
• Central west NSW is becoming less bulk export centric:
  • Growth of ‘upcountry’ container packers.
  • Major local consumers continuing to grow.
  • Northern NSW and southern Queensland cattle on feed increases.
  • Newcastle/Tamworth poultry market continues to grow.
• Road freight costs versus rail freight costs are narrowing with limited export surplus; with corresponding reduced bulk handler competitive advantage.

Conclusion

Utilising on-farm storage often provides a compelling case, however all costs, risks and rewards need to be considered when comparing this option with alternative storage options.

The market will dictate what commodities and grades are best stored on-farm, however a general rule is the market will value what is most scarce.

Consider a wide range of buyers as your customer including consumers, traders, container packers and stock feeders.

If you are going to store on-farm, put thought into why you are storing grain and what your customer values. Value creation should be your motivator for establishing or utilising on-farm storage.

Contact details

Stuart Clarke
Senior Commodity Trader – Wheat
Robinson Grain Trading Co LTD
46-48 East Esplanade, Suite 301, Manly NSW 2095
02 9976 3625
stuart@robinsongrain.com.au