Making sense of the mystery of the market

Tuesday, November 1, 2011

Growers know all about planting and harvesting. But, for many, the ebb and flow of the grain markets remains inscrutable. Here, the marketing development manager for a major grain company offers some guidance

by TONY BALKWILL

Don Kabbes is sitting in front of several monitors wired directly to the network of the Chicago Board of Trade (CBOT). On the screens are colourful graphics, depicting endless numbers of pennies, dimes and quarters being spent or paid.

With the click of the mouse, prediction charts surface showing end-user stocks. Another click to an e-mail: "USDA reported a 250k MT corn sale to an unknown destination."

Then it's back to the morning markets screen: "Wheat up 3 cents on the C1Z. Basis improvement looks to be plus 10 cents, local basis trading at -50 cents now."

Kabbes is market development manager for Great Lakes Grain (GLG). "If you plan to grow a crop," he says, "you have to plan to sell one."

There is a science to growing a crop. It is repeatable, even predictable. We know the critical timings for plants to reach their maximum potential. But, for many farmers, the ebb and flow of grain markets remains a mystery. How do we ensure the best price in an era of volatility? How much weight should we give to those U.S. Department of Agriculture (USDA) crop reports? How do we plan for the other half of the grain commodity business?

In a recent interview, Kabbes responded to many of the questions I have heard raised while working with farmers in their fields. Here's what he had to say.

How much does Ontario's growing region influence U.S. or international markets?
Very little. Ontario grows four million acres of row crops versus the United States at 360 million. We do not have much of an impact on world markets.

Why are the markets so volatile these past few years?
There are many reasons. The supply of grains has been reduced, creating greater demand than supply. The large Russian drought of 2010, with the subsequent export ban, created a big demand for wheat around the world, inflating values. The vast amounts of speculative funds entering the marketplace have created huge swings in price. The large moves in the value of the U.S. dollar make commodity markets change in value. Ethanol currently uses over 40 per cent of the U.S. corn crop, whereas 10 years ago it was almost non-existent.

How important is it for growers to know their costs of production?
This is crucial for every grower. The cost of production must be crop-specific and analyzed each growing year. Variables like yields and selling price per bushel will all have an impact on the cost of production.

How big of a role do USDA projections play in the grain market?
They are huge. The USDA's predictions are the main driving factor for all grain markets. Whether or not we think of them as right or wrong, we have to base our marketing decisions on them.

Should we as growers try to "predict" these reports and base marketing decisions on them?
Well, it's hard to do and, looking back over this past summer, there is no real way to predict a market call before it becomes public. Building a marketing plan and choosing price targets for selling constitute the best way to eliminate the volatility that these reports can create in the market.

As an overall percentage, how much grain would you recommend a grower market before harvest?
This depends on how much risk a producer wants to take. Some won't market anything until it's in storage; others will market up to a 100 per cent of what they grew the previous year. As a general rule of thumb, market up to your crop insurance average.

How to you recommend growers make a "marketing plan?"
The first thing is to understand your costs of production and your operation's cash flow requirements, rent, financial payments, etc. Then look at your storage options (your own or commercial) and the amount you have to move at harvest. Once this is done, you can look at price targets, contracts and end-user opportunities. This will help build a marketing plan.

Would you advise growers to use brokers to handle local and end-user grain sales?
They can help in finding opportunities in several different markets and can get you great short-term prices. They can't, however, give you the spikes in the markets, or help with forecasting plans, and they don't have any real grain to leverage the market with over a long period of time.

When hedging a grain market, when is the best time to sell?
If you take a look at a seasonal corn chart, there are about four peaks that happen during the year that have been witnessed over the past 30 years as the best time to sell, based on each grower's cash flow needs and the marketing risks they are willing to face. But corn does follow a somewhat predictable curve, so basing your sales around those high points is a good hedge.

With the increase of growers investing in their own on-farm storage, what advantages does that give them?
It gives them the opportunity to sell to outside markets or direct to end users. This also gives them a seasonal advantage in being able to market grain all year long.

What disadvantages does on-farm storage have compared to commercial storage?
The cost of storage and the risk of spoilage or higher moisture. Even drying and hydro can be a huge cost and they change with the seasons. So it can be hard to factor into your cost of production.

What role does the basis play throughout the marketing year?
The basis today is the spread between the Canadian value and the CBOT price. A negative basis means we have a high supply of that commodity in the area, so an end user will offer a sale price lower than the CBOT. In August, we had a positive basis for old crop corn. End users were in need of product, so they enticed growers to sell by offering a higher price than the CBOT.

What are grain companies like GLG doing to help growers take advantage of current markets?
We are allowing growers to do both day and night trading. We have introduced an online offer centre, where a grower can determine a target price for his grain on a pre-determined amount of bushels and which allows us to watch the price of the grain and contract the grain once the target is met. This takes the emotion out of marketing the grain. We help the grower build a marketing plan, beginning by determining the number of bushels he will produce, his cost of production, storage space, money requirements, etc.

With your role in GLG, what areas of market development do you see having more impact in Ontario?
We are trying to bring the market closer to the farmer. We are visiting our end-use customers to see what they are looking for in the products we supply them. Are there attributes to management systems that will produce a better quality product for our end-use customers? We are currently working on sulphur levels in wheat to try and improve gluten strength in the finished flour. This may help us sell more wheat to markets we are currently not in.

Where do you see the market taking us over the next five years?
I think we will continue to see very volatile markets. Ethanol demand will continue. Crop production needs to keep pace to feed a hungry world. World economies will continue to be unstable, adding to the volatility.

What will be the key factors that growers will have to watch?
Growers need to be marketing when it makes sense in their farming operation. Selling grain for a profit on a planned approach makes good business sense. The market has seasonal trends that need to be watched. The market has a number of roles.  Its first role is to buy as many acres as possible. Once they are planted, it will try and buy those acres at the most affordable price. It also has a role in rationing demand as supply gets limited. If the belief of the market is that there will be a shortage, the price needs to increase to ration demand. BF

Tony Balkwill is a crop specialist with Great Lakes Grain in Welland.