Neil Blue had only been farming a year or so when he came to an important realization — if you’re selling grain, it pays to educate yourself on the best way to do it.
Blue grew up on a family farm and began farming on his own in Vermilion, Alta., in 1981. When he went to sell his first wheat crop, Blue did what was a common practice back in those days — he called his local elevator and asked if he could bring in some grain.
“The first load of wheat I brought in from my first crop was graded a No. 3,” Blue says. Back then, he adds, you generally didn’t question the grade at the elevator. “You take your cheque, deposit it in the bank, and carry on.”
Things were different when Blue brought in a second batch of wheat.
“About five months later, I phoned up the elevator manager, took another load in and it graded a No. 1,” he says. “It was out of the same bin, and that started the wheels turning on how could I have done better here? What am I lacking?”
As Blue tells it, the essence of what he lacked was a clear understanding of grain marketing, and an appreciation of how a robust marketing plan can help farmers get the most out of their hard-earned crops.
Blue began educating himself on grain marketing basics, adding a few tips from his father along the way.
“My dad actually used to use the futures markets to hedge rye back when rye traded on the commodity exchange, and so I asked him about it a time or two. He told me about the idea that it didn’t matter once he had a sell position on the futures if the market went up or down — he was hedged,” Blue says. “That was interesting to me.”
Blue went on to teach grain marketing courses, and he eventually joined Alberta Agriculture as a provincial crop market analyst, a position he’s held for the past six years. He continues to farm today, albeit on a much smaller scale, and he still relies on a grain marketing plan as a foundational piece to his farm’s success.
“I think it gives (people) a lot more confidence in their business decisions (and) it gives a certain amount of structure to their decisions,” Blue says.
Blue acknowledges many producers don’t have marketing plans and tend to wing it when it comes to selling grain. For many, he says, it’s because they just don’t like that aspect of their farm business and much prefer making production-type decisions. He believes for some others it could be “a lack of knowledge and uncertainty that’s keeping them from making a marketing plan.”
Reg Dyck, a retired farmer who teaches farm business management at the University of Manitoba’s ag diploma program, believes grain marketing can be intimidating for many producers.
“I think (some) farmers throw up their hands when it comes to marketing, I think it scares a lot of farmers,” he says.
The danger for farmers who don’t have a grain marketing strategy is they could end up selling at lower prices that, in some cases, may not be enough to cover their costs and/or meet their cash flow requirements.
Developing and sticking to a marketing plan that outlines how and when grain should be sold throughout the crop year can help producers not only optimize profits but also manage and reduce their farms’ business risks.
So where to begin? Grainews asked Blue and Dyck, along with Brian Wittal, general manager of Paterson Grain’s Foothills Terminal in Bowden, Alta., to share their thoughts on the best processes for setting up a grain marketing plan.
Know your costs
Our experts agree the starting point for any grain marketing strategy is knowing what it costs to produce your crops.
Farmers need a firm grasp of their per unit production costs, Blue says, “because without that, there just isn’t enough information to make a decision on what a good price is.”
Dyck believes too many producers don’t have a firm grasp of their costs of production. One thing he tries to hammer home with his students is how important it is to have a realistic budget that factors in all farm expenses.
Wittal says “know your numbers” is something he’s always stressing to farmers. Production costs include not only crop inputs but also everything else from fuel expenses and storage costs to insurance and interest payments on equipment, he adds.
“It’s a business, and you’ve got to know that,” says Wittal. “At the end of the day, honestly, you need to cover off all of those things, even your cost of living.”
Wittal believes farmers who don’t have a good idea of their per unit production costs often have a harder time making grain marketing decisions. “They’re just unsure or it takes them too long to make a decision.”
Determine your break-even price
Nobody wants to sell at a loss, so the next step after figuring out the production cost of each bushel you’re selling is to calculate the break-even price for your grain.
“One hopes to make a profit always, but a break-even is a starting point from which to know if you’re in a profitable position or not with that sale,” says Blue.
“No one can ever really outguess the market, and so it’s important again to fall back on those cost of production and break-even numbers as the guideline to be able to make that decision on pricing.”
The break-even price should be based on realistic yield numbers, which can be average yield projections or actual yield, he adds.
“It’s important to know your yield information, which most farmers will have after harvest. But even prior to harvest (you must) have an idea what expectations are, and just generally using an average is OK on that,” he says.
Dyck says grain producers should be mindful of their per unit production costs even in a boom market, because as grain prices go up, the costs for such things as crop inputs and rented farmland usually aren’t far behind.
“Everything goes up when grain prices go up. So, again, you need to be pretty shrewd with your cost of production when grain prices go up,” he says.
Examine cash flow needs
Once farmers have a handle on their production costs and break-even numbers, Blue says they should look at their cash flow requirements, such as loans, bills and cash obligations over the coming year. Ideally, producers should try to arrange grain sales so there’s always cash on hand when it’s needed.
“(It’s important) to have a really good idea of what your cash flow needs are and the timing of that. That way, you can prepare yourself in advance of bills being due (and) meet those cash flow needs with sales that are planned in advance,” says Blue.
Wittal says producers putting together a marketing strategy who are planning to grow their farm operations should consider not just current production costs and cash flow obligations, but estimates of future expenses as well.
“You need more than just to cover your costs if you want to be expanding machinery or buying land and these kinds of things,” he says. “To do that, you’ve got to be maximizing what it is you are doing on your farm right now, because you want to generate extra revenue to be able to expand.”
Farmers in this situation, Wittal adds, may want to be a little more aggressive in their grain marketing approaches, than “the individual who’s happy with his farm the way it is (and) just wants to continue to make some decent profit, year in, year out.”
Set sales targets
The next stage in assembling a marketing plan is setting price targets and timelines for selling your grain over the crop year. Producers must factor in their production costs, break-even prices and cash flow obligations, and they also need to look at pricing patterns and how to manage risks related to crop production and a farm’s finances. Also, storage capacity is another important consideration.
Of course, there’s also the question of how much money you hope to make off of your crop. Dyck stresses objective No. 1 should always be to cover your costs and clear some profit. He believes if you can sell your grain in the upper price ranges over the course of a year, you’re ahead of the game.
“If you can market in the top third, then I think you’re probably doing pretty well,” says Dyck.
Consider pricing and delivery alternatives
Western Canadian farmers have a fair bit of choice when it comes to marketing their grain these days. A deferred delivery contract, which occurs when grain companies quote a fixed price and a specified delivery period in the future, is probably the most common method.
Others include selling for cash at spot prices and hedging by using various futures and options strategies for crops that have a commodities market. Producer car shipping is another delivery option but, according to Blue, it’s not as popular as it once was among Prairie producers.
Blue acknowledges deciding between all of the different pricing and delivery alternatives can pose a challenge for many farmers, especially those with little grain marketing experience.
“I could see how that might be a daunting task for farmers who aren’t really initiated in this stuff,” Blue says. Because of that, he believes producers shouldn’t be afraid to seek out help if it’s available.
“A lot of grain companies now provide a lot of different cash pricing alternatives, and so it may be useful to try to learn as much about those as possible,” says Blue. “The grain companies have marketing representatives that can help out with that.”
Put plan to paper
A last step is to sit down and draft a marketing plan that specifically states what, when, how much and what method will be used to sell your grain. And once you’ve made your plan, stick with it.
Wittal says farmers who understand grain marketing and treat it as an important part of the business know it takes discipline for a marketing plan to work. Those who stray too far from the plan can risk falling into the same traps as those who don’t have a marketing strategy, such as panic selling.
Of course, that doesn’t mean a grain marketing plan is something to be seen as set in stone. No plan is perfect and there will be times when adjustments are necessary — which is why our experts agree it’s important you review and evaluate your marketing plan regularly to make sure it is working for your operation and achieving your marketing goals.