| | Introduction | Planning to market | Understanding pricing and delivery alternatives | The psychology of marketing | Summary | Return to Grains & Oilseeds Marketing page | Return to Special Commodity Marketing page
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Introduction
Marketing is a broad term with many meanings. To the crop producer, marketing should mean more than just selling. Marketing includes setting financial goals, assessing risk, exploring pricing and delivery alternatives, seeking market opportunities and keeping one’s pride in check.
Nobody can outguess the market and always price farm products at or near prices peaks. Producers tend to sell either “too soon” before the price peaks or, more often, “too late” after a price slide, because the price was never “good enough”. Most often, crop producers price or sell within the bottom third of the price range “offered” through the course of a crop year. Few producers consistently price or sell within the top third of the yearly price range. Those that do, however, are astute, experienced marketers and spend considerable time watching for premium selling opportunities and following through on securing marketing contacts.
Good marketing takes planning, selling discipline, access to good market information and a good understanding of pricing and delivery alternatives. Expecting to price everything at the market peak is an unrealistic expectation. If a producer’s goal is to net higher than average prices, he or she must understand that selling at the price top is more luck than good market management. To sell at higher than average prices, scaled up selling strategies are most often used. Marketing goals should aim to net higher than average prices for the entire crop production, not just one truckload.
Planning to Market
Farmers often sell for reasons not even related to maximizing returns. Non-market reasons for selling might be a shortage of bin space, fertilizer or chemical bills are due, for yearend tax planning, hauling weather is fine or making room for next year’s crop.
Astute marketers have two things in common. They have a marketing plan and they have selling discipline. Planning to market means calculating costs of production and determining your individual appetite for risk. Keep in mind, accepting total risk runs the chance of not being in business next year. Feeling uneasy and losing sleep are two sure indicators that it’s time to develop a marketing plan.
Planning to market starts at the basics and well ahead of any seed being booked or cleaned.
Know costs of production
Before any pricing or marketing strategy can be developed, one must know exact breakevens using realistic yield expectations. Ability to assess and control production risk must also be analysed. Pencil in a profit or, at least, family living costs to arrive at a minimum selling target.
Spread sales over a 12 to 24 month period
Spreading sales allows opportunity to price into three to four market rallies that occur in an average crop year. Farmers can target pricing into each rally and avoid delivering into congested markets. Astute marketers seldom incorporate the “all or nothing” approach of trying to hold everything and market it all at the market peak.
Avoid pricing during heavy delivery points
Prices slump during heavy delivery periods, which contributes to the normal seasonal pattern of both price and basis levels. Commercial storage space tightens during heavy delivery periods and buyers lose interest in buying products. Some typical heavy delivery periods to avoid are:
- During harvest – late August, September and early October
- As 90-day deferred pricing contracts, sometimes called storage contracts, expire often during mid-December,
- During periods of producer selling to generate cash flow selling, often in late October or late December.
Gather sources of information
The telephone is still a powerful marketing tool. When deciding to price, a variety of information sources should be contacted. Maintaining regular contact with local buyers and a cash grain broker, a crusher, a commodity futures broker and a market analyst will round out opinion to help make informed selling decisions.
Organizing a new marketing club or joining an existing marketing club is an excellent way of becoming aware and developing information sources.
Know your product
Astute marketers realize that market intelligence is useless unless it’s combined with sound knowledge of what is for sale. Submitting representative samples from each bin to the Canadian Grain Commission (C.G.C.) for grade and protein assessment (depending on the crop) helps identify the market channels available to the farm manager. The C.G.C. won’t blend number two-quality grain to the top grade, but they will clearly identify what a producer has to offer.
Understanding Pricing and Delivery Alternatives
Once a producer knows what quality of product he or she has to sell, he or she can further evaluate different marketing alternatives. There are two key timing related judgements:
- What is the price outlook?
- How much price risk is acceptable?
For financially conservative producers, a higher proportion of their crop should be priced, at a profit, if possible, before it is actually delivered. If the price outlook is poor, that portion should be increased accordingly. Grain can be contracted using a deferred delivery contract or hedged to lock in a current local price. Producers, who can withstand higher financial risk and stress or who believe the price outlook is stronger, may leave a higher portion of their production unpriced. Grain can simply be left on the farm unpriced or on a commercial deferred pricing contract, sometimes incorrectly called a storage contract.
A general rule of thumb is to position a portion of your grain so that a telephone call is all that it takes to lock in the price. Although it’s not always practical, avoid having to deliver to lock in a rally. Weather and busy times of the year will limit a producer’s ability to deliver to take advantage of a good pricing opportunity.
Planning to sell begins with local research. Start by familiarizing yourself with all potential buyers within what you believe is a reasonable distance from the farmstead. Some astute marketers map all potential buyers within a 50 to 100 mile radius. They then visit potential buyers and drop off representative samples of their crops. That accomplishes two things:
- It highlights the pricing and delivery alternatives available within an economic distance of the farm.
- It establishes important personal contacts and sends a positive message to potential buyers.
Be prepared to ask buyers what they need. Producers, who don’t drop off representative samples, should describe their type of crop and grade. Exchange business cards if possible. Buyers may have immediate demand for a particular quality.
A price premium offered by a particular buyer may be short lived. However, if buyers know producers and their product, they will know where to call. The growers, that buyers contact first, are always those that the buyers know.
The Psychology of Marketing
The most common farm selling strategy is the “wait and see” approach. Often, producers store grain on the farm until cash flow needs dictate that they must sell. Greed can distort sound marketing judgements. Marketing requires pricing discipline to control pride.
The typical reaction to an upward trending (bullish) market is greed. Prices are rising so grain marketers hold back deliveries in an attempt to sell at the top. Once the market peaks and starts to decline, greed turns to hope that prices recover. During the hope phase, producers don’t sell. The market continues to fall and hope now turns to fear. During the fear phase, farmers are still reluctant to sell. Local cash prices are now too low to cover costs of production, so grain remains in farm storage. The market fails to recover. Now, as prices continue to fall, fear can turn to panic. Bills are due and cash grain must be sold. The greed-fear cycle is shown in Figure 1.
Figure 1. Greed-Fear Cycle
Summary
Understanding good marketing principles is just the beginning to becoming an astute farm marketer. Pricing crop in the top third of an annual price range requires time, discipline, market awareness and a good marketing plan. Other modules in this Agricultural Marketing Manual will provide more much detail on how to improve farm managers marketing abilities.
Further information
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