- Globally, competition is pushing producers to increase productivity.
- Consider forward-pricing options as part of your strategy.
- Stay focused on cost of production when establishing your required return on investment.
- Reduce fixed costs for a direct impact on the bottom line.
The anticipation of tight margins and stiff competition prompted marketing talk to start very early, long before producers had put seed in the ground.
Some farmers may have found it strange to hear suggestions that they start thinking about marketing crops they haven’t even planted yet, let alone harvested.
But thinking ahead about marketing is good management. It’s the way producers in many other commodities and industries realize success. Consider the marketing and planning that went into the current “crop” of anything – cars, trucks, clothes, you name it. Those efforts were conceived well in advance of being executed.
That level of planning should go into agricultural commodity marketing, too.
"You need some strategies to make sure you have options."
Start planning early
J.P. Gervais, Chief Agricultural Economist at FCC, says one impetus for marketing that’s universal, regardless of the commodity, is competition. Competition is pushing producers around the world to increase productivity to meet a growing food demand. That’s where forward pricing options come in.
“They are an important management strategy,” Gervais says. “As a producer, your production plans are set for the spring. So once that’s complete, why not start having the discussion about marketing tools such as forward marketing? I believe producers should use all the tools available.”
Forward marketing – that is, setting the price now, for future delivery – could be an unusually helpful tool this year. Markets react to shifts in weather patterns and prospects of stronger or weaker demand from export markets and domestic processors or crushers.
North American soybean producers plant in the spring with the expectation that significant trends, such as stockpiling by China, will still be prevalent in the fall, and that profits on sales then will be meaningful. But what if that’s not true?
“Let’s recognize there is risk and that the market is volatile,” Gervais says. “Producers should take measures to lessen the risk.”
Producers often worry about crop failure and not having enough grain to meet their forward-pricing obligations. Certainly, with futures contracts and deferred delivery contracts it’s important to keep production risk in mind. However, production risk isn’t a worry with options contracts and contracts that include an “Act of God” clause.
Try the clean-slate approach
When it comes to marketing plans, Brian Voth, Vice-President of Operations for Agri-Trend, urges farmers to wipe the slate clean every crop year.
He says the temptation is strong to repeat any profitable approach. But so much can change from year to year that last year’s successful marketing strategy might not be appropriate anymore.
“Each year needs to be approached independent of what happened the year before,” he says. “Everyone wants to sell all their crop at the height of the market, but you don’t know when that will be. So you need some strategies to make sure you have options.”
Voth says once prices get to the point where you’ve hit your projected return on investment, sell. You know your cost of production, and how much you want to make from your crop. So, once you reach that sweet spot, sell some of your crop. Waiting could see it rise, but it could also see it drop. Lock in a profitable price.
Look forward, not back
Once you sell, let it go. Don’t look back, Voth says. Focus on what you have left to sell, not how much more you might have received if you held out longer. Don’t get down on yourself if prices go higher – especially if you still have grain. You’ll still make more money on what you have left.
He warns producers to not give in to envy, to how much someone else is purported to have made on their sales. “I chalk it up to coffee-shop talk,” he says. “In a conversation about prices, the last guy to talk is always the one with the best price … but what was their volume – a small amount in some bins that they had left hanging around? And especially, what were their costs?”
Factors such as paying for new equipment will result in a higher cost of production. So even if a neighbour got a higher price, their profitability might not be much different than yours if you sold for a lower price but with lower costs.
Along with marketing, Voth urges producers to look at other areas, such as reducing fixed costs. Many farms growing the same mix of crops will have similar operating costs. But some farmers may have figured out ways to reduce their fixed costs, and that goes straight to the bottom line. “And in the long run,” he says, “lowering those costs are key to profitability.”
Repurposed from a July/August 2015 AgriSuccess article by Owen Roberts
Owen teaches agricultural communications at the Ontario Agricultural College, University of Guelph, where he’s director of research communications. He’s also a freelance journalist.
Did you know that we host learning events across Canada on topics just like this? Find an event near you.