Grain Marketing Consistency: Why It Pays

Friday, November 14, 2014

Farming has become a high-volume proposition with razor-thin profit margins. In the most recent census (2012), U.S. farmers had record-high sales of $394.6 billion, but it cost them $328.9 billion to produce their products.
 
And costs keep rising. In Iowa this year, expenses for machinery, seed, chemicals, fuel, and labor were $4.97 per acre for a corn crop—increased from $4.50 per acre in 2011 (U of Iowa Extension Service).
 
At the same time, the Farm Bill is a less dependable backstop than it used to be.
 
“The safety net is getting thinner all the time, so the onus of marketing is falling more and more on the producer himself,” says Ed Usset, Grain Marketing Specialist with the University of Minnesota’s Center for Farm Financial Management. “Saying ‘I didn’t do anything, but I can live on the loan deficiency payment anyway,’—that's going by the wayside.” That way of thinking, in fact, ended some time ago.
 
A Rational Discipline
With the squeeze on, growers need every edge they can get in their grain marketing—and small advantages can add up big when they're practiced consistently.
 
“It is widely held that a 10% increase in price can have a significant impact in improving the bottom line, at times by as much as 200%,” writes Extension Agent Carl German in his online guide, The 21st Century Grain Marketing Primer. “Farming today—particularly with the higher investment to plant each acre—requires grain sellers to know how to use all of the marketing alternatives available to them.”
 
Grain marketing in this economy should be a year-round, rational discipline, say consultants. But with so many options—plus price volatility—farmers may be tempted to rely on their instincts rather than reason.
 
“Farmers are by nature optimistic about the market,” observes Usset, who counsels growers at Winning the Game grain marketing workshops across the U.S. “There’s a tendency to think, ‘The price is good today and it will get even better tomorrow.’”
 
But practiced over a lifetime, that thinking can cause costly mistakes, such as holding old crop past July, which has a poor history of success. Instead, Usset urges a consistent “find-the-dime” approach that tips the balance sheet into the profit zone every year—a more realistic goal than trying to strike the market high.
 
“I’ve long ago gotten rid of the notion that I’m going to beat the market,” says Usset. “I tell people if anyone guarantees you some fantastic return, put your hand on your wallet and back out of the room.” (Note: Usset does not endorse any particular brand of contract.)
 
A Proven and Consistent Advantage
One dependable contract option farmers have had for more than 10 years is Cargill ProPricing. The premise is simple: Farmers can tap into the collective market insight of over 143,000 Cargill employees by committing a portion of their bushels to the Cargill MarketPros trading professionals, who take a diversified and disciplined approach to establish a favorable futures price during a given contract period.
 
In theory, the program sounds good. But what does the evidence say? Does ProPricing deliver a consistent price advantage?
 
The data are in—and the news is good. Recently, Cargill analyzed five years of final ProPricing contract price results, compared with average prices farmers received from cash sales to Cargill. The conclusion?
 
Since 2009, Cargill has paid ProPricing farmers $220 million more for their grain than farmers who did not use ProPricing. The advantage is overwhelmingly consistent over contract periods, and the margins are significant.
 
“Farmers who use ProPricing recognize significant benefits,” says Jeff Klock, Cargill ProPricing Product Line Leader. “In fact, 86% of the time, farmers who use ProPricing outperform customers who sell to Cargill on their own.”
 
The data suggest the greatest advantage when ProPricing is used consistently from year to year. In fact, growers who use ProPricing every year make $14.40 more per acre than those who jump in and out of the program—a difference that can translate into significantly greater lifetime income.
 
“If the owner of a 1,500-acre corn farm enrolled half of his crop in ProPricing every year during a 45-year career,” says Klock, “our analysis shows he could earn $1.1 million more than if he sold his crop to Cargill on his own.”
 
Since farmers can only market up to 50% of their expected bushels with ProPricing, Klock points out that they still have other options to use more conservative or more adventurous marketing, depending on risk tolerance.
 
“But when you sit down and plan your strategy,” Klock advises, “It’s smart to commit a consistent percentage of your grain to ProPricing contracts every year.”
 
Sticking With a Plan
Having market discipline during years when prices are falling—like they have been in corn—is the biggest challenge for farmers, says Usset. Despite market trends, growers should practice sound marketing habits: knowing their production costs and watching for a price that will return a small profit—or, in the worst market cycles, minimize loss.    
 
“It’s been a challenge for corn over the last year, but it shouldn’t change your approach,” says Usset. “Don’t look at $4 corn, shrug your shoulders and say ‘What’s the use?’ No, look ahead. Be ready to take advantage of opportunities if and when they show up."
 
Editor’s Note:
Ed Usset’s book, Grain Marketing is Simple (It’s Just Not Easy), is available on Amazon.com. For more on Cargill ProPricing’s comparative price results study, see how Consistency Pays.

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