Business Marketing

Taking grain marketing to the next level

 

When it comes to marketing, Canadian farmers won’t forget 2021 anytime soon. High commodity prices early in the year motivated most farmers to price a portion of their grain. After all, this was what typical marketing strategies said to do. But as prices continued to rally, the desire to capture the high also continued and many contracted more of their crop.

When the summer season brought heat and drought to Western Canada, poor yields meant many were unable to deliver on their contracts and had to buy themselves out at high prices.

That outcome stung the entire industry. In some cases, the financial consequences were significant and even farmers who were not impacted by the drought were left thinking that it very well could have been them.

As David Derwin, portfolio manager at PI Financial Corp. in Winnipeg, Man., puts it, 2021 was a textbook example of why you want to have adaptability and flexibility built into your marketing plan.

Two market reactions

Market volatility has continued in 2022 and grain experts from across the country say most farmers are reacting in one of two ways — they’re either taking the initiative to improve their marketing strategies or they’re paralyzed by uncertainty and aren’t taking any action at all.

“Farmers wear a lot of hats and are extremely good at being adaptable on the production side of their operations,” says Derwin. “The benefits of having more flexibility on the marketing side is really the lesson that many learned or better understood after last year.”

[READ MORE] These three farms have made fundamental changes to how they market. Should you too?

He’s encouraged that more farmers are reaching out to learn more about grain marketing tools. Most have recognized that more can be done to market their products, but they acknowledge they don’t necessarily know how, Derwin reports.

Derek Squair, president of Saskatchewan-based Exceed Grain Marketing, says his business is experiencing similar growth. He believes the majority of farmers today are seeking some type of marketing support, meaning the group that is sitting on the sidelines in fear is a smaller one.

“All kinds of factors are putting the spotlight on marketing right now and farmers are asking what they should do in these volatile times,” says Squair.

What farmers find, though, is that the sector is changing. It’s a different place than it was even a couple of years ago.

Changing market trends

Neil Townsend, chief market analyst at FarmLink, says today’s marketplace feels more global than ever before. The change can be seen as a positive because there are a growing number of markets interested in buying Canadian products, but it also means there are more factors outside of agriculture that have a big influence on pricing and market direction.

The pace at which the market moves has been steadily increasing over the last 10 years but in the last three years, the volatility has escalated, according to Squair.

“The markets are changing daily, sometimes hourly, and we have to constantly be on top of it,” Squair says, noting that more dollars than ever before are being invested in commodities, which causes volatility for both buyers and sellers.

And even though farm businesses are growing in size and scale, individual farmers are still small players compared to the grain, food processing and export companies.

Between these market factors and production uncertainty, Derwin encourages every farmer to continually ask how they can become more adaptable at marketing.

When someone brings this question to him, he narrows in on what their exposure is and what opportunities and risks they are facing. “It’s about finding ways to protect the downside and also take advantage of the upside,” Derwin says.

Derwin often recommends what he calls the multi-tool of grain marketing — options. While futures and options may have been viewed as speculative tools a few decades ago, he says they are now used as a more disciplined approach to managing revenue.

“The role options can play is separating pricing decisions from delivery decisions,” Derwin says. “If the price is good, you can take advantage of it and protect your grain without promising your grain.”

Especially for farmers who experience stress and worry about market fluctuations, Derwin suggests thinking about options purely as price insurance, not connected to production.

“If you buy some downward price protection and the price goes down, that’s great because insurance is going to kick in,” he says. “If you use options and it goes up, you’ve spent money on the premium but like buying insurance on buildings, you aren’t necessarily upset that they didn’t burn down.”

To demonstrate these types of marketing strategies, both Derwin and Squair use different types of examples and mock trades as educational tools. Regardless of prior knowledge or experience, this type of guided, hands-on learning builds confidence.

Financial technology

“It’s impossible to know it all,” Squair says, “so a lot of what we do is research crops around the world and pass that on to the producers so they can make marketing decisions based on what’s going on in Germany, for example. ”

Costs are important, but most grain marketing advisory services say they focus on keeping their fees realistic. Across multiple businesses in the industry, it would be difficult to find any service that would be five figures, says Townsend.

As technology advances, farmers have learned how to operate the physical side of their business efficiently. Now, Derwin sees the focus starting to shift to financial technology.

“Awareness is building and more people are starting to learn more about the different marketing tools that exist,” he says. “It takes them some time to get comfortable with the tools and then when they reach out, someone can help take them to the next level.”

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