BEING PROACTIVE PAYS OFF
THE VALUE OF A WELL-DESIGNED MARKETING PLAN
BY JON DRIEDGER
It’s no secret that farming can be extremely stressful. Weather is a constant threat—from planting conditions in spring, to the amount and timeliness of rain during the season, and finally the risk of adverse conditions during harvest. Markets are also a source of stress for farmers and, like the weather, we have no control over what prices will do. But there are actions that growers can take to help reduce their vulnerability to volatile markets and, in the process, their anxiety over price volatility.
The single biggest thing producers can do to help reduce marketing stress is to develop a detailed marketing plan in advance. This starts with knowing the cost of operating your farm, accurately and in detail, for each crop. It is equally as important to clearly map out the anticipated cash flows for the crop year. Most producers might have a pretty good idea of their numbers, but it’s hard to overstate how important it is to peg the figures as accurately as possible.
The next step is to have a good understanding of the fundamental outlook for each of the crops that are grown on the farm. Which markets have greater upside potential? Which markets are more vulnerable to a sharp pullback? What are the key bullish and bearish dynamics to monitor in each market, and how might shifts in these dynamics change the price outlook?
The purpose of a detailed outlook isn’t to perfectly forecast prices—markets are uncertain and unpredictable, and no one has that perfect crystal ball. But it does allow you to navigate through all the market noise and gauge how to respond to events. Is that market rally a good pricing opportunity, or just the beginning of a possibly longer-lasting move? Is that “special” being offered at the local elevator a timely chance to get a sale on the books during a window when movement is needed, or is it something that can comfortably be passed on? A solid marketing outlook goes a long way when it comes to knowing how to respond.It’s also important to understand the
It’s also important to understand the pricing and risk management opportunities for each market. For example, some crops offer the potential for forward pricing contracts, but the grower takes on all of the production and quality risk (e.g., wheat, durum). Other crops will commonly have “act of God” clauses built into a forward contract that can remove this risk (e.g., malt barley, lentils), but this may only be offered in exchange for locking in at a lower price. Crops that trade on futures markets provide opportunities to use put options, which provide downside protection without capping the upside potential or taking on production risk.
The most important part is when the on-farm margin goals and cash flow needs are combined with the individual crop outlooks and risk management opportunities. Crops with greater downside risk can be planned for more aggressive sales earlier in the year, perhaps allowing for those with a stronger outlook to be held back for better pricing opportunities later. Use of “act of God” clauses where available can make a nice fit for fall sales with limited risk. Maybe a rally in wheat or canola could allow you to lock in some values while still leaving the upside open.
Successful marketing is often less about what happens in the market than it is about how you respond to what happens in the market. Many of the pieces of the puzzle start to naturally fall into place when the farm needs are laid out well in advance, and holes get filled when market opportunities present themselves. This removes much of the guesswork around whether it makes sense for your business to sell grain on any given day or not.
There is no magic formula that can make price risk disappear completely. Every action to reduce risk requires some type of trade-off, whether it’s production risk, forfeiting an upside opportunity or premiums on an option. But a well-researched marketing plan designed in advance of the growing season can be a very powerful tool to help determine how to respond to changes in the market, make the right decisions for your business and reduce a great deal of stress along the way. It’s a lot of work, but it is proven to be effective and profitable.