The crop you take off each year is your biggest asset. You make strategic and agronomic decisions about what variety to grow. You purchase and maintain expensive equipment to manage it. You make input decisions to maximize it. You spend time hoping Mother Nature will be its friend.
And then you sell it.
Investopedia says “An asset represents a present economic resource of a company … can be thought of as something that in the future can generate cash flow.” In many ways, your farm operation is similar to a lot of other businesses. Grain is your inventory just like vehicles are at the local dealership or sporting goods are at Cabela’s. Small adjustments to the price of inventory will have a huge impact on the success or failure of any business. If costs remain the same, and Cabela’s or the car dealership move their prices up by 5%, the bottom line looks very different. Those decisions aren’t made lightly and are strategically important for the business. It’s the same for you and your grain.
All those very important decisions you make throughout the year to grow the biggest and the best crop are measured against one of the last decisions you’ll make about it. The price.
Why we need to be better at determining a target price for our grain
I’m sure you’ve heard lots of talk about price transparency in the grain industry. In fact, we here at CXN360 are passionate about it. We think it’s one of the things that holds some farmers back from being great at marketing their grain. We also think it’s one of the things that makes grain marketing confusing and intimidating to some.
Imagine a scenario where you knew the prices for all recent sales and had access to active bids in your area. If this were the case, you could use this information to determine the real value of the grain assets you hold. For example, if you knew that all the No. 1 Canola in your area was selling for $492 – 512/tonne, you would have a solid idea of what your grain was worth.
Instead, you probably determine the value of your grain based on offers that come in periodically from grain buyers you’ve done business with in the past. You can also access industry published average pricing. This is good information – but it doesn’t tell you what the highest price was, the lowest, or what quantities were traded for at different prices. It also doesn’t tell you how those prices relate to your geographic area. You need this information to understand your local market. The published information so far gives you one data point – “posted” prices.
The reality is, a lack of truly relevant price information creates uncertainty. By “truly relevant” I mean specific to your area and real bids – not just benchmarks or averages. Where there is uncertainty, we have fears of regret – fear that you’re missing the best deal or price. Not having this detailed information also puts you at a disadvantage. Educated guesswork or “good enough” pricing isn’t the best strategy for selling the most valuable asset to your business!
Gathering the right prices
In the agriculture industry, everything is seasonal, including prices. You need to understand the impacts of that seasonality on your business – the upside and the downside. When you have a steady stream of pricing information throughout the year, you can better understand and monitor those seasonal trends.
Let’s step away from grain for a minute and consider fertilizer. Generally, your cheapest price window is in mid-summer the year before it will be used. Then the next windows are in the fall, prepay in December and January, and possibly some price dips in March. After March, prices are pretty much locked and loaded for the year unless a major supply event takes place. For budgeting purposes, you can generally establish price expectations for each seasonal window.
You can’t set your fertilizer price expectations based on prices that you can’t realistically take advantage of. For example, if urea prices are $25 per tonne cheaper in Southern Manitoba then they are in your neck of the woods in Central Alberta, that Manitoba price is meaningless. Just like you can’t use December fertilizer prices to set your expectations for purchases in April, you can’t use prices outside of your geographic market.
Grain pricing follows a very similar pattern. In the case of grain though, you’re “selling” instead of “buying”. But that doesn’t minimize the need to gather price information, understand the regional market, and set a price range for each seasonal window. You know that the highest prices traditionally occur the further you are from harvest. We often see a price increase during seeding, with the lowest cash market values during harvest.
In an ideal pricing scenario, you’d understand the price range each season, in real-time. A daily view of bids throughout the year helps you paint that picture and increase your understanding of the market.
Using price information to your advantage
How you act on the price information you receive is up to you. It basically boils down to two options:
- Use the information to improve your marketing plan with better projections
- Secure the best deal today
Your actions are part of your bigger marketing and cash flow plans. It’s a combination of seasonality, cash flow projections, and balancing price with terms that meet your needs. If a current price offer makes sense for you, you can choose to act on it. However, you can also choose to adjust your marketing plan based on how the market is developing – in real time – and in your area. It gives you more control over the entire decision-making process. If for example you know you need to forward contract some grain in the spring to support your cash flow during spraying, you can sit back and monitor the local market for months leading up to inking a deal. You can spend those months adjusting your projections so you have a better sense of how much you need to contract and what pricing you might need to secure.
Today’s approach to pricing our grain
It used to be difficult to price shop for anything. You had to call around or visit different locations to find out their prices. Those days are gone. You simply go online and do a basic search.
Just look at how vehicle sales have changed because of the internet. Buyers are savvier today. They do their research ahead of time and come in to a dealership with expectations that dealers will have to accommodate to make the sale. It’s a very different experience than it was just a decade or so ago.
While things have changed for other industries, getting grain market information can still be difficult. You probably have 4 or 5 or maybe 6 buyers who will text (or phone or fax) their bids to you when they need grain. You might get notified of specials on occasion. In this scenario, you’re simply reacting to their bids. If you want to be proactive, you need to find time to call around to those same buyers and let them know what you want to sell. Then you wait until they get back to you with an offer.
What if you want to forward contract grain this spring?
Do you have a bunch of time to call those dealers while you’re seeding?
How soon will they get back to you and will the offers be good enough?
Much like the new world of buying a vehicle, the internet holds a solution to help price your grain. An online grain marketplace like CXN360 takes care of a lot of the leg work for you. When you sign up you indicate what crops you grow and are interested in pricing information for, and you start to receive local bids for those crops via text to your phone. This gives you the local insight you need to establish a realistic target price you’re your crop. You can choose to act on the bids, or use the information to make better decisions down the road. It’s also a simple process to be proactive and put an ask out for your grain. So, setting the right target price to forward contracting that grain in the spring, while seeding, is suddenly a very do-able task.