Grain Marketing Tools At Your Disposal

As a former Grain Buyer for Viterra, I thought it would only be fitting to discuss grain marketing in my first Seed Perspective at Pitura Seeds and try to share what I learned working for a multinational grain company. Grain marketing is not easy, no one has a crystal ball, and if they did, they wouldn’t be working 9-5. Statistics like the one claiming that 85% of farmers market their grain in the bottom third of the market don’t do the farmer justice. Farmers have the most to lose and also deal with variable weather, cash flow and bin storage constraints that sometimes don’t give them a chance to be efficient marketers. In addition, it takes time. Geo-politics and macro-economic events have played a huge part in driving market prices in the last 5 years, and it can be overwhelming to try and keep up with the global news cycle.  

From an independent perspective, I want to highlight three over the counter products that are available today with some of the Canadian Grain Companies that I’m confident will help you better manage risk on your farm when it comes to grain marketing.

Before we move into the products and strategies, we need to understand how a grain elevator establishes a cash price – the price you see posted on a text or email message. The cash price is comprised of two components, futures price and a basis. The futures price is set by the market, each commodity has it’s own respective futures exchange that they trade on, anybody can buy and sell contracts on this exchange whether they own physical product or not. Most grain exchanges that post futures prices are open from 8:30am to 1:20pm and the prices change by the second. The basis on the other hand is entirely set by the grain company, since the futures price is in USD, the basis acts as a conversion factor. It also includes elevator costs such as elevation, labour and overhead. Freight costs, cleaning, interest and margin are also all factored into the basis. It’s important to understand futures and basis since they are entirely independent of one another and the grain price fluctuations at the elevator are impacted by both.

1.     Daily Market, Pacer or Futures Tracker

The first product I want to highlight is the average priced contract. It has a different name depending on the company but they all work the same and it’s available at Cargill, Viterra and G3. This product allows you to sign a basis contract (no futures attached) and select a pricing window. Your grain is delivered against the basis contract while the futures portion of your contract stays open. The grain company then takes the closing futures price of every trading day in your pricing window and averages it out at the set deadline. This will give you an average futures price plus your locked in basis. Why I like this product:

-Removes emotion from grain marketing which is one of the biggest challenges
-You are guaranteed not to be in the bottom third!
-It sets a benchmark for you; if your additional sales are above or below the average value, you know where you stand.
-Simple, easy and stress free

2.     Minimum Price Contracts

Viterra and Cargill offer this product in the form of a call or put option. In trading terms someone would buy a call option if they thought the price would go up, and a put option if they thought the price would go down. You pay a premium to have the right to buy/sell the underlying futures contract at a given strike price. For example, a farmer with soybeans in the bin, buys a call option with $11.00 strike price, if the soybean futures move from $11.00 to $12.00, the grower gains the $1.00 increase, if the price moves from $11.00 to $10.00, the grower can use his call option to protect the drop in price and is protected at $11.00. Put options work in opposite fashion and instead of realizing a gain if markets go up, you would only gain if markets fell.

The products that are offered at Viterra and Cargill don’t work precisely in this nature, but use these principles behind the scenes to offer you minimum price protection. It’s great if you have market bias in one direction or another but you’re still nervous about price fluctuations. If you need to move grain, want to leave the price open but protect downside risk, this product can do that too. Or, you can also structure it in a way that allows you to deliver grain, collect on your minimum price and still leave it open for any future upside that could be gained.

It checks a lot of boxes:
-Sets a price floor
-Leaves room for upside
-Flexibility with delivery and pricing window
-Works for bullish and bearish farmers 

3.     Producers Choice / Focal Point

Producers Choice is Viterra’s branded product and Focal Point is the equivalent at Cargill. This type of product can be useful in multiple scenarios however, I’d like to focus on the following: you priced grain in a deferred month, a few weeks after locking in your price, new information or a macro event has come to your attention and your attitude towards the market has changed, you would like a second chance to reprice your contract.

This product would allow you to leverage the grain you’ve already sold and attach a Producers Choice/Focal Point type product to it. You would choose a futures “strike price” as a benchmark, if the futures price rallies above the strike price you would profit from that difference. The closer the strike price is to your initial priced contract the more expensive the product will be, the further away it is, the cheaper it will be. This product is reasonably priced altogether but doesn’t offer much for downside risk, so you would need to have a strong bullish sentiment before buying this product.

Benefits:
-Allows you to re-enter the futures market after already selling your grain
-Cheaper alternative to other products available
-High pay out if you are right 

Everywhere else on your farm you’re insured – crop, equipment, buildings and contents, but rarely is the price of your grain insured. There are endless resources to help you with grain marketing, free services like Barchart, paid newsletters and advisors are all familiar to most. However, if you can try to put a bit of trust into your local grain buyers, it can also go a long way. By seeing it firsthand, there’s been a big increase in time and resources being put into farmer education by companies like Cargill, Viterra and G3 in recent years. Log into the webinars they put on, find out what separates them apart from one another, and try to educate yourself on some of the products they offer like the ones I highlighted above. These products cost money, but the way I see it, you are pro-actively spending to protect your grain price rather than reactively selling grain after the market has dropped by a significant margin.  My line is open if anyone would like an unbiased opinion from a past elevator man!

~Jacques Remillard