By JONATHON DRIEDGER
MARKET
MONITOR
Opportunityor risk?
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 anticipat-
ed 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 influ-
ence 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 uncer-
tainty 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 deci-
sions 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 ful-
fil other needs. Spot sales during harvest
often turn out to be the most disappoint-
ing 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 in-
flux 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 be-
yond 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 be-
tween wanting to secure what is available
and not wanting to leave money on the ta-
ble. That balance between managing risk
and opportunity will vary by farm. But
each operation benefits by doing detailed
planning well in advance, having a thor-
ough 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.
Jon Driedger is a senior market analyst
with Farmlink Marketing Solutions.
Spring
2015
grainswest.com
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WIDER BUYErS’ NETWORK A KEY TOSUCCESS
