To know your markets, lean on your network
The value of relationships
Building relationships and monitoring commodity prices are key components of marketing farm production.
Frederic Castonguay, FCC territory relationship specialist, comes from a sales background where he learned the importance of establishing strong and long-lasting relationships. Those come with knowing your customers, what matters to them and what you can provide 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 honed great relationships with colleagues, even holding a golf tournament to show appreciation for their farm suppliers. Berry says farmers should talk to anyone that can benefit from their opportunities to market commodities at premium values. That includes other farmers.
It also pays off to extend long-term relationships with buyers.
“They’ve often been exposed to something that you have not,” he says.
It also pays off to extend long-term relationships with buyers.
“If they’re in a bind looking for something to fill a void, the people they know and trust will get that opportunity,” Berry says.
Neil Blue, Alberta Agriculture and Irrigation’s crop market analyst, also sees value in cultivating relationships with a network of contacts for following prices and obtaining market commentary.
“Doing so helps a producer have more confidence in making sales decisions,” Blue says. “Alternatively, some producers do not 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 futures markets
Once you have others’ perspectives and have a sense of how to price your products, it’s obviously important to find out if you’re getting a fair deal. One way is to follow futures markets and use those prices as a guide.
“Producers can follow futures markets for information that relates to their products,” Blue says. “In doing so, it’s useful for a producer to have some knowledge of the relation between a specific futures price and the value of their commodity, that is, the basis for that commodity.”
The basis is the difference between the prices of the cash – the actual physical commodity – and futures.
Canola is the only crop with Canadian dollar-denominated futures, although farmers can still access U.S. dollar-denominated markets.
“It’s useful to be at least aware of exchange rates and their effect on prices of one’s commodities to market, particularly for the exchange rate between Canada and the U.S.,” Blue says.
When tracking futures, western Canadian spring wheat growers focus on the Minneapolis Grain Exchange’s hard red spring wheat, but in Ontario, where the bulk of the crop is soft red winter wheat, producers look to the Chicago Board of Trade’s corresponding wheat market.
Additional U.S. dollar-denominated futures of use to Canadian producers include oats, corn, soybeans and soybean products, and cattle and hogs.
Futures vs. local prices
Because barley doesn’t have its own futures contract, growers will monitor the direction of Chicago corn futures.
But the correlation isn’t consistent from year to year, says Blue. During years of heavier-than-usual corn imports from the U.S., the barley-to-corn futures relationship becomes more relevant, he says.
Price discovery gets even murkier for commodities without any kind of corresponding futures markets.
“If a producer only has the cash market available for a product, they should know their costs of production and understand the factors affecting each of those commodities,” Blue says.
For instance, there isn’t much that pulse and special crops growers can look at that correlates consistently, Blue says.
That means it’s even more necessary for growers to check local market conditions and pursue current bids from buyers.
Sell or hold?
So now that you’ve talked with people in your networks, taken in all your price data, and considered bids from buyers, what do you do with this information? Some say to compare prices to those of six to 12 months ago, while others urge making a sale whenever it’s profitable. No one, however, recommends waiting for market highs, which are nigh impossible to predict.
“Because nobody knows what prices will do in advance, it’s generally a good strategy to price commodities incrementally over a period of time,” Blue says.
The timing of sales will differ between grain growers and cattle and hog producers.
“A crop producer with a storable product can more easily spread the sales commitments out over time,” Blue says. “Livestock producers may need to deliver their product within a narrow time frame.”
Cattle and hog producers, however, do have some forward-pricing alternatives to consider using, such as the Western Livestock Price Insurance Program, forward contracts with buyers and the U.S. livestock futures markets, he notes.
Another general rule is to mind seasonal patterns, such as how a great deal of cattle and grain gets brought to market in the fall. Marketing outside of those traditional marketing seasons, as well as forward pricing, can be significant advantages.
A forward contract is a means of reducing price risk by locking in a price well ahead of the expected purchase date. Blue notes many producers who forward-price also do so to meet their cash flow needs.
From an AgriSuccess article by Richard Kamchen.
Strategic partnerships become part of a business plan that supports a family farm while protecting the lands surrounding it.
From cash flow planning to net worth statements, get the basics you need to prepare for a loan application.
From understanding debt and managing cash flow, to farm taxes and ratios, download a guide of our best financial basics.