Seeking biggest bang for buck | Cargill says two-thirds of grain is sold in bottom one-third of market
Demand for grain marketing advisory services is going through the roof under the open market as growers sort out how to best sell their wheat, barley and durum in a volatile pricing environment.
Cargill Ltd. got into the business in a big way about five years ago after making a startling discovery.
“Two-thirds of the grain that we purchased was sold in the bottom third of the market,” said Cargill president Len Penner.
That revelation provided a clear signal that growers needed help selling their grain and they still do today.
Cargill estimates 60 to 70 percent of the wheat the company received in October was priced the previous winter before the summer run-up in prices.
That’s why the company is investing so heavily in its grain marketing consulting service. Cargill claims it has rapidly become the largest advisory firm in Canada.
The grain company employs 34 advisers servicing about 500 clients scattered from Alberta’s Peace River district to Ontario. Over the next few months Cargill is expected to add another six advisers.
“It has been hands-down the fastest growing portion of our overall business, which is a signal,” said Penner.
“It’s saying there’s a need out there.”
Derek Squair, president of Agri-Trend Marketing, said demand for marketing advice is definitely snowballing and there is no end in sight.
Agri-Trend’s client base has grown 75 percent in the last year. The problem is that the company has increased its staff by only 25 percent to 24.
“We’re trying to find market coaches as fast as we can. We’ve got more demand than we can find people qualified to do it,” said Squair.
Ideal candidates would possess a commerce or agricultural economics degree, have five years of grain elevator experience and five years of grain merchandising.
“You need somebody who has been around the block a little bit,” said Squair. “Those people are tough to find.”
Agri-Trend is hoping to hire nine coaches to serve the Alberta market over the next six months. Saskatchewan and Manitoba are already well covered.
Mark Lepp, business manager for FarmLink Marketing Solutions, another major player in the western Canadian grain marketing advisory business, said the companies are just starting to tap the market for this service. Only a small fraction of growers are paying for one-on-one advice.
“There is for sure a growing market out there for what we do,” he said.
Lepp, whose firm employs 27 advisers, said with the demise of the CWB monopoly, a lot of growers are looking for advice on how to market their wheat, durum and malt barley.
“They can quickly see the value of bringing some outside expertise in to help supplement their knowledge and their research base and help them make their decisions,” he said.
Penner believes the demise of the single desk, combined with soaring grain prices and increased market volatility, are the three factors behind the surge in demand for advisory services.
“Now all of the sudden you have the attention of the farmer who’s saying, ‘I’ve never received this much money for a bushel of my wheat. What do I do?’”
Squair said the business was growing rapidly before the transition to an open market but now it is exploding.
“We’re having a lot of success with wheat growers,” he said.
Farmers don’t have much experience marketing wheat and it is a far more complicated crop to sell than canola due to the confusing array of classes, grades and quality factors.
Squair agreed with Penner that many farmers are better at growing crops than selling them. Agri-Trend research shows that 70 percent of farmers sell in the bottom 25 percent of the market.
He believes that’s because grain prices take an escalator ride on the way up and an elevator plunge on the way down. Sixty days of price gains can easily be wiped out in three days of losses.
“The market is typically the most bullish when it’s ready to correct, so (farmers) miss it and they panic sell on the way down,” said Squair.
Growers are competing against sophisticated hedge fund money managers and technical buyers and sellers.
“You can get beat up really fast.”
The three big advisory firms operating in Western Canada are in fierce competition for grower dollars.
Penner said Cargill Canada is able to offer clients access to the parent company’s global network of experts.
“We have feet on the ground in 68 countries from a grain and grain movement perspective. We monitor what happens in 147 countries,.”
Squair counters that Agri-Trend, which is strictly a consulting firm, is a more streamlined operation than its grain company counterpart.
“We don’t have the overhead that Cargill has, so we’re very well priced versus them,” he said.
Lepp said FarmLink has been on the scene the longest and boasts that his company has a client retention rate of 93 to 95 percent.
Some customers have been with the firm for all of its 10 years in the business.
“Keeping the clients that we have happy has been critical for us to continue to grow,” he said.”
Penner said marketing advice can have a much bigger financial impact on a farm operation than the company’s agronomy consulting services.
Cargill has 15 risk management tools in its portfolio, including futures contracts, options puts and calls, stop loss orders and market orders.
Growers could have used some of those tools to help them participate in the run-up in grain prices that happened in 2012 rather than selling in the trough of the market.
“This is one of these areas that truly will make a difference to a farmer’s income. It has huge potential to have a positive impact,” said Penner.