The value of relationships
Building relationships and monitoring commodity prices are key components of marketing agricultural production.
FCC Territory Relations Specialist Frederic Castonguay has a sales background that taught him the importance of building strong, lasting relationships. This includes knowing your customers, knowing what is important to them and what you can offer them, showing them that you understand their needs and long-term goals, and adding value, he says.
Chad Berry of Over the Hill Farms and Under the Hill Farms near Cypress River, Manitoba, has built good relationships with colleagues and even hosted a golf tournament to show his appreciation to his farm suppliers. Berry says farmers should talk to anyone who can benefit from their ability to market commodities at premium prices. This also includes other farmers.
It is also worth developing relationships with buyers in the long term.
“They were often exposed to something you didn’t have,” he says.
It is also worth developing relationships with buyers in the long term.
“If they're in a bind and looking for something to fill a void, the people they know and trust will get that opportunity,” Berry says.
Neil Blue, agricultural market analyst for Alberta Agriculture and Irrigation, also sees value in cultivating relationships with a network of contacts to track prices and obtain market commentary.
“This helps a manufacturer gain more confidence in their sales decisions,” says Blue. “Alternatively, some manufacturers don’t enjoy making their own marketing decisions and instead rely on subscription-based marketing services to provide advice on when and how much to price.”
Follow the futures markets
Of course, once you know other people's perspectives and have a feel for how to price your products, it's important to figure out whether you're getting a fair deal. One option is to follow the futures markets and use those prices as a guide.
“Manufacturers can follow the futures markets to get information about their products,” says Blue. “It is useful for a producer to know something about the relationship between a certain futures price and the value of his commodity, i.e. about the basis for this commodity.”
The basis is the difference between the prices of cash – the actual physical commodity – and futures contracts.
Canola is the only crop with futures contracts denominated in Canadian dollars, although farmers still have access to markets denominated in U.S. dollars.
“It is useful to at least be aware of exchange rates and their impact on the prices of goods brought to market, particularly for the Canada-U.S. exchange rate,” says Blue.
When pursuing futures, spring wheat farmers in western Canada focus on the hard red spring wheat from the Minneapolis Grain Exchange, but in Ontario, where the majority of the crop is soft red winter wheat, producers look to the equivalent Chicago Board of Trade wheat market.
Other U.S. dollar-denominated futures for Canadian producers include oats, corn, soybeans and soybean products, and cattle and hogs.
Futures vs. local prices
Since barley doesn't have its own futures contract, growers will be keeping an eye on the direction of Chicago corn futures.
But the correlation isn't consistent from year to year, Blue says. In years when U.S. corn imports have been above average, the relationship between barley and corn futures has become increasingly relevant, he says.
Price determination becomes even more difficult for raw materials without corresponding futures markets.
“If a manufacturer has only the monetary market available for a product, they should know their production costs and understand the factors that affect each of those goods,” says Blue.
For example, for legume and specialty crop growers, there isn't much that correlates consistently, Blue says.
This makes it all the more important for producers to check the local market conditions and follow up on current offers from buyers.
Sell or keep?
Now that you've spoken to people in your networks, collected all of your pricing data, and considered bids from buyers, what do you do with this information? Some recommend comparing prices to six to twelve months ago, while others urge making a sale whenever it is profitable. However, no one recommends waiting for market tops, which are almost impossible to predict.
“Because no one knows in advance how prices will move, it is generally a good strategy to gradually price raw materials over a period of time,” says Blue.
The timing of sales will vary between grain farmers and beef and hog producers.
“A crop producer with a storable product can more easily spread sales obligations over time,” says Blue. “Livestock producers may need to deliver their products within a tight time frame.”
However, he notes that cattle and swine producers could consider some alternatives to forward pricing, such as the Western Livestock Price Insurance Program, forward contracts with buyers and the U.S. livestock futures markets.
Another general rule is to consider seasonal patterns, such as the way many cattle and grain are brought to market in the fall. Marketing outside of these traditional marketing seasons as well as forward pricing can be significant benefits.
A futures contract is a way to reduce price risk by locking in a price well in advance of the expected purchase date. Blue points out that many producers also use forward pricing to meet their cash flow needs.
From an AgriSuccess article by Richard Kamchen.
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