OPPORTUNITY OR RISK?
WIDER BUYER’S NETWORK A KEY TO SUCCESS
BY JONATHON DRIEDGER
As seeding time draws near, most growers are either contemplating, or perhaps have already initiated, some sales for 2015 production. Good marketing planning demands that sales be anticipated well in advance, and timed in response to market signals rather than forcing grain off the farm when there is a need for movement. However, each decision requires the right balance of reducing the risk of prices falling while still leaving the opportunity to capture higher values if times get better.
This trade-off—managing negative outcomes without forfeiting too much upside—and the timing of when to make a move makes for a challenging decision. Detailed market analysis can really help. Of course, no one has that magic crystal ball, but a thorough understanding of the fundamentals and market structure for each crop on your farm will help provide a sense of market direction and give clues as to which markets have relatively more risk than others.
But it’s perhaps even more important to know those key factors that will influence prices in the coming months, which better allows one to respond when new information enters the market. In other words, in many cases we “know what we don’t know,” but that shouldn’t stop us from anticipating which actions we should take when the unknowns start to become clearer and the markets react accordingly.
For example, we are at a stage in the annual cycle where the global supply and likely demand is fairly well known from last season, but we are heading into the Northern Hemisphere production window. There is a great deal of uncertainty over the size of the upcoming harvest in critically important regions such as North America, Europe and the former Soviet Union. Given that many major crops are reasonably balanced from a fundamental perspective, a swing in production either well above or well below expected levels can quickly make balance sheets bearish or bullish. There’s just no way of knowing how this will play out until we are well into the growing season.
The right way to navigate these decisions will vary by farm. Some operations have less ability to weather a period of poor prices, so the need to protect margins becomes more important. Many farms are required to move a lot of grain in the fall due to limited storage or to fulfil other needs. Spot sales during harvest often turn out to be the most disappointing ones, so the ability to lock in those contracts in advance will usually pay off. Other operations don’t have to deal with either of those constraints, and have the ability and appetite to take on more risk in an effort to achieve higher prices if the outlook justifies it.
Something that can greatly improve marketing and risk management flexibility is the use of futures and options. Securing attractive futures prices while waiting for basis levels to improve, locking in a floor price on more bushels than you would otherwise be comfortable forward selling on a cash contract, or placing some upside price protection to cover some potential buyout risks on existing new crop sales are all strategies that can enhance the options available to the farm. The ability to do these contracts yourself through a futures broker, instead of relying on the contracts that a specific buyer is offering, puts more control in your hands and still allows you to shop around the physical grain for the best deal.
Another thing growers need to consider is being in touch with a wider network of buyers. The last few years have seen an influx of new companies becoming involved in the western Canadian landscape. Each entity offers something a bit different, and it’s worth exploring what’s out there beyond the normal few buyers that you have dealt with in the past. Cash grain brokers can be particularly beneficial as they deal with a wide network of end users, many of whom you might not otherwise know to contact.
Markets are volatile, and it’s not easy to strip the emotion out of selling decisions. Each one is fraught with that tension between wanting to secure what is available and not wanting to leave money on the table. That balance between managing risk and opportunity will vary by farm. But each operation benefits by doing detailed planning well in advance, having a thorough understanding of the fundamentals for each of its crops, anticipating how to respond to new information that changes the landscape, and maintaining as much flexibility as possible while still covering the farm’s needs.