Reducing the stress of grain marketing
GroundCover™ Issue: 108 | Author: ORM Communications
“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.”
The three areas in the framework (Figure 1) are:
- internal structure;
- planning; and
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.
“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.
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.
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.”
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.
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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.
GRDC Project Code ORM00004