Although the end of the 2012 grain growing season is now well and truly in sight, getting the crop to harvest unhindered is only one element of a successful season. Deciding how and when the grain will be sold can make a huge difference to the annual profitability of a grain growing business and as such, marketing decisions can bring with them a level of anxiety.
With a desire to optimise the profitability of its own crop, BCG has been recently investigating marketing options.
This year, in a paddock donated to BCG and looked after by the Ferrier family, a Hindmarsh barley crop has been grown. BCG CEO David Chamberlin recently met with John Ferrier and Viterra regional sales manager Steve Schumacher to assess the crop and to discuss marketing options and the tools offered by grain marketers to help mitigate risk and harness opportunities.
The first step was to inspect the crop and come up with some yield estimates that would be helpful when making marketing decisions, as well as insuring the crop.
“It was interesting to note how individuals have different perspectives when it comes to making these estimates,” David said.
“While both of us were happy to take a risk in one direction, one wanted to target a higher price (than the current offer) and the other wanted to commit a much higher than normal tonnage forward, so the two concepts were opposing and a compromise was needed.”
David said the debate highlighted the complexity of grain marketing decisions, particularly when more than one partner is involved.
“The crop appeared quite varied,” David said. “We eventually estimated it would yield an average of 2.5 t/ha, and based on the grain price at the time ($230/t), have insured it accordingly.”
To assist with these decisions BCG uses Yield Prophet® which takes into account rainfall, crop type and inputs and soil test data, which coupled with the climate outlook, can help to forecast yield.
With the recent rainfall events, David said the paddock had enough moisture to finish for harvest but frost was still a risk and would need to be considered when formulating crop expectations.
“Cost of production is also a consideration when making a marketing plan,” he said. “But for BCG’s crop this is less so because the paddock, equipment and labour are donated.”
Cash flow is another key consideration when formulating a marketing strategy, as is any potential tax liability.
Steve provided David with information on options for spreading out the sales including pools and deferred payment schemes.
He said a pool tends to deliver an average cash price over the term of the pool, but most pool operators try to do better than average. Deferred payment options are available and are best discussed with your financial advisor.
David said that for BCG cash flow is better sooner rather than later.
“As a not-for-profit organisation we normally achieve small surpluses or small losses so don’t have a tax issue. We also don’t have storage available so this needs to be taken into account when making our marketing decisions,” he said.
“From our estimate of production at 400 tonnes, we have the option to commit tonnage up front, sell at harvest, go into a pool or put it into the system.
“To capture the current forward price levels we agreed to commit 30 per cent of the crop forward as a multigrade contract, in two commitment dates, and locking in the feed spread, which leaves the malt possibility open for any opportunity at harvest. “
To have a chance at a market upside BCG could also use TPA’s (Targeted Price Agreement) to offer a quantity of the crop at higher than current prices with the aim to lift the average price.
This option would see the balance go immediately into warehousing (so no decision is needed at the silo) at feed or malting grade depending on testing at the time. Once BCG has fulfilled the first contract, any crop that makes malting at harvest time would probably be sold straight away.
“If it goes feed, we plan to sell approximately another third soon after harvest and leave about third to consider against shifts in the world markets,” David said.
“We’ll do some check samples before harvest to get an indication of the likelihood of malt or feed which will help to decide on the marketing too. “
This is the BCG game plan which (hopefully) suits the organisation’s situation.
“Of course everyone’s situation is different,” David said.
“Now that I have my first experience of formulating a grain marketing plan I have a much better appreciation of the planning work and complexity of the decisions.”
BCG wishes its members good luck with their grain marketing plans for this harvest.
Results from BCG’s 2010 ‘Grain Marketing Challenge’ (Click to view) can be found here.
