A few years ago, I produced a series of video programs for Alberta Agriculture on marketing grain and livestock. I interviewed a feedlot operator about forward pricing cattle and he said the farmers he bought barley from made the same mistake continually, which cost them money and him aggravation.
When he ran a little short on barley, he would raise his price a bit and put the word out to his regular suppliers that he needed some. But instead of receiving more barley, he would receive even less because the farmers would try to squeeze him to pay more. He would raise the price a little more and still no barley. A little more – nope.
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Finally, in desperation he would go to the Canadian Wheat Board, buy what he needed and drop his price to the local farmers. The next day, farmers were lined up in his driveway, their trucks overflowing with barley.
He said he even offered to pay for a broker from Red Deer to teach these guys how to market properly, just so he could receive a reliable supply.
Of course the farmers said no to that, knowing it was an evil plot between the shifty feedlot operator and the conniving broker, and as far as I know they are still selling their barley at prices below what they could receive.
According to most marketing experts, at least two-thirds of grain is sold into the bottom third of the annual price range each year.
There is a mental process farmers go through that causes them to sell at this low price. It is the same one most amateur investors go through, which sees them selling at a loss when they could have made a profit.
It works this way:
- The price of grain starts to rise, but we don’t sell, because “it is going to go up some more.” This is called the “greed” stage. We don’t know when we have enough.
- Sure enough, the price continues to rise, but we don’t sell yet, because we are trying to hit
the top of the market. This is the
“pride” stage. If we hit the top, it will give us bragging rights at the local Whine ‘N’ Cry café for 20 years.
- We hang on through the peak, although we only know it is the peak in hindsight, and the price drops a bit. We still don’t sell, because we “hope” the price will turn around and go back up.
- The price continues to drop and we begin to “fear” it might not turn around, but we hang on in case it rallies at least a little.
- It continues to drop, and we “panic,” not knowing where the bottom is, and sell. The bottom usually turns out to be pretty close to where we finally sold.
So, what do the smart marketers do? According to the experts, there are a few simple steps:
- Know your cost of production. Statistics show that fewer than 25 percent of farmers accurately know what it costs them per unit to produce their crops, so they don’t know when they could sell at a profit.
- Do all the market research you can to get an idea of what the price range might be this year. Look at historical price trends to know when the rallies usually occur and be ready for them.
- Set price targets that start above cost of production. Every 10 percent or so that the price rises above cost of production, sell some grain – say 10 to 20 percent. If the price keeps rising, sell another 10 to 20 percent as each target is hit.
If you have sold all of this year’s crop, and the price is still rising, sell some of next year’s crop. This means you will have to learn about forward pricing and maybe hedging and working with the basis.
- Take a grain marketing course. You’ll learn faster and can use marketing simulation games, which means you don’t have to risk real money.
I was talking about marketing with a farmer from Westlock, Alta., the other day, and he said he has been applying the above principles for some time, which allowed him to sell into a canola rally a year or two ago that gave him more than $10 per bushel. Of course his neighbours hung on for $11, and ended up selling at about $6.
As some wise fellow once said: you will never go broke making a small profit.
How much are you leaving on the table?
Edmonton-based Noel McNaughton is a sponsored speaker with the Canadian Farm Business Management Council. He can be reached at 780-432-5492, e-mail:farm@midlife-men.com or visit www.midlife-men.com.
