Should grain growers build on-farm storage bins to store grain crops so they’ll be able to sell when the price is better? That used to be the case, but not anymore. In recent years prices haven’t been much better in the spring, so why invest in huge storage bins. There are better options for marketing grain. One thing to remember is that the days of simply selling grain when it was traditionally done, or when needing cash flow, are long gone. Marketing grain can be a very complex business. Here are things I’ve learned as a cash-crop farmer:
Forward contracting: Forward contracting has become one of the most commonly used approaches. The most important feature of a forward contract is it allows capturing opportunities to lock in good or profitable prices when the market presents them, often long before the actual delivery time. Markets these days seem to have a significant propensity for volatility. Markets in a specific commodity can rise due to some production concerns, such as drought, or fall due to expectations for an exceptional crop resulting from a favourable growing season.
Currency exchange rates: In today’s world, factors affecting all sorts of markets are much more complex. One of the key factors is currency exchange rates, and although very important, it’s not just our Canadian rate against the United States dollar, but significantly the relationship of many currencies to each other. Now, as this volatility pertains to marketing, the objective should be to lock in some pricing, when a factor of one kind or the other has moved the market into a favourable or unexpected price zone. The goal should be to get most of the pricing done in the top quartile for the marketing year. However, wanting to sell only at the highest point of the market can backfire since the peak can only be identified after it has passed. Therefore the important factors in establishing a profitable marketing plan is to know one’s costs of production, adjusted for present factors, such as fertilizer prices.
Storage premiums: This can pretty much always be captured throughout the marketing period, which not only includes the crop year, but can precede it by as much as a couple of years. Sometimes, as is the case with corn, a producer can actually collect storage on something he hasn’t even produced yet. These premiums often tend to erode over time, especially in years of ample supplies, thereby making this an important consideration in a marketing plan.
A really great way to nail down a storage premium well in advance, and even if the current market price isn’t appealing, is to execute a forward contract, and then replace the ownership through a futures contract. This approach unfortunately, does require setting up an account through a Futures Brokerage firm.
A basis contract: Another marketing approach that seems to be gaining in popularity is setting a basis contract. The basis is the spread between the cash market at point of delivery, and a specified Futures Market. On corn and soybeans this base futures market is Chicago Mercantile Exchange. The basis incorporates the currency exchange factor, as well as the local supply and demand picture. The advantage of using this approach is usually under circumstances where you either need to, or wish to make delivery, but aren’t happy with the current base market, and believe the market should improve over time.
Production in South America: One other factor which has evolved over time and is now more than ever, markets are impacted by production in other exporting countries. The best example of this would be the rapid expansion of soybean production in South America. Since that production enters world markets about March, and competes with the 59 percent of Ontario soybeans that are exported, it might be difficult to find good compensation for storing soybeans beyond that period. Since there are so many different scenarios and factors, marketing effectively has become a significant challenge.
