Solid strategies help producers improve profits

Farmers can greatly benefit from writing commodity marketing strategies that include their cost of production, informed selling price targets and marketing tool options.

Numerous factors go into marketing, but quantifying production costs is the most critical, says IntelliFARM president Brian Voth.

“But it’s shocking how many farmers don’t know their costs – they have a general idea – or don’t want to know,” Voth says.

Among other information, cost of production reveals the minimum breakeven price required.

A solid commodity marketing strategy can help safeguard against profitability risk. A grain marketer, a portfolio manager and a farm management expert weigh in on developing one for your farm. Tweet this

Price targets

When determining your commodity’s worth, Voth advises removing greed from the equation.

Futures markets are helpful price discovery tools, but come with challenges: exchange rates are one, with futures predominantly prices in American dollars. Another is that crops like barley, durum, flaxseed and pulses are without futures markets.

There’s value in knowing cross-crop references, with feed barley prices tending to follow corn futures, and flax tracking canola and soybeans, Voth says.

“There might be enough cash bids you can solicit from different buyers and elevators to get a sense of what’s out there,” adds David Derwin, portfolio manager and investment advisor for PI Financial Corp.

Grain firms, however, have a reputation of closely guarding their prices.

“Transparency in pricing is something the grain companies don’t want,” Voth says.

But the market pays those who do their homework, he insists.

Voth urges producers keep on top of supply/demand data and where prices are at relative-to-historic carryout or stocks-to-use ratios. And Canfax offers cattle producers domestic and international market information.

Marketing tools

Derwin adds that marketing tools help level the playing field.

“It can be a combination of using futures to protect and capture some pricing, (and) options to develop a range of prices that give some upside but more importantly (protect) your downside,” Derwin says. “Grain companies will have deferred delivery contracts or forward contracts and you can book your elevator space and lock in a price.”

Basis contracts are also useful in grain and cattle marketing.

Planning gap

Manitoba Agriculture found only 25 per cent of farmers in the province had commodity marketing strategies in 2015, and Farm Management Canada (FMC) executive director Heather Watson says adoption figures are similarly low across Canada.

“I can also tell you the adoption of planning practices writ large remains fairly low – around 20 to 25 per cent across the board – and that’s across all types of farms,” Watson says.

FMC was part of a five-year study in Ontario that found the percentage of farmers who had completed commodity marketing plans fell to nine in 2016, down from 23 per cent in 2011.

Watson says farmers tend to get their business practices in order when times get tough rather than using them as a proactive.

Bottom line

Farmers risk profitability without commodity marketing strategies. Experts advise development of a strategy by considering the cost of production, the value of the commodity and effective use of marketing tools. 

Article by: Richard Kamchen