Seems like a pretty obvious statement. The markets change everyday, all day, right? The deregulation of the Canadian Wheat Board (CWB) was a generational change that was news outside of just agriculture. Farm consolidation means elevators have far fewer suppliers (farmers), and those suppliers have more leverage (and risk) than ever before. These are just a couple examples of the dramatic change that has occurred over the last 10-15 years. Today I want to reflect on the changes that have happened, are happening, and I think need to happen to Grain Marketing not Grain Markets.
I set out to start the grain marketing business I operate today 15 years ago. Really all I knew of the grain markets then was that there had to be a better way! The CWB was the primary “issue” I thought. I realized that although the CWB took a lot of heat for many years about their marketing performance, sales prices were not the problem. The net prices achieved by the CWB were really not that bad. There is certainly room for debate of the efficiency or spending of what was after all a farmer/government “owned” company, but the sales prices they passed on were average for the crop year. Average, at that time, was considered to be good. Remember the “fact” that still gets passed around about how farmers sell 2/3 of their grain in the bottom 1/3 of the market range (ask me how I feel about this “fact”)? Well if that is the case then the Wheat Board performance should have been praised, not criticized right? The problem that brought the CWB down (in my opinion) was not their marketing performance at all, but the necessary processes and limitations involved in operating a monopolistic, averaging (pooling), government financed business. As farmers grew they simply could not rely on unpredictable movement and less predictable initial/interim payments for grain already shipped. You cannot run multi million dollar businesses with that unpredictability of sales and cash flow. One of the issues underestimated in everyone’s enthusiasm to eliminate the CWB though, is that without them how would farmers access information necessary for good decision making? How would farmers adapt to having to market their Wheat, Durum and Barley? The CWB was arguably the most globally connected grain marketing organization in the world. The next best being the international grain companies. The furthest from sources and markets was you, the farmer. That gap was the #1 issue, not the Canadian Wheat Board.
Of course the CWB only controlled a few crops, but marketing the others was no picnic either. The challenge was access to reliable, accurate, global market information. As farmers we got 90% of our intel from grain buyers, who got it from their head offices, who got it from brokers, who got it from importers, who got it from end users. That should be fine, right? Why wouldn’t 5 layers of individuals trying to secure product for as little as possible give us resources to sell it for as much as possible? Not only were the sources suspect, but the flow of information was far less than adequate. 10 years ago farmers were difficult to reach. Not everyone had a cell phone, and even if they did they were out of coverage most of the time. Even when farmers had a few minutes to do market research it was low on the priority list, and internet speeds were a limiting factor in rural areas to say the least. Then even if you wanted to do research, what would you look for? Where would you look? Could you interpret the data you found? So we did the best we could, but did it really help our marketing performance getting information so long after it happened? In the time it took to get that information the price setters had reacted, and moved on to new information. The information delay was extremely inhibitive of good marketing. We produce grain for a global market, but knew little of what was happening outside our own Rural Municipality or our province, let alone the world.
Enter Market Experts and Analysts. 30 years of experience buying or trading grain. Worked at or near the top of grain companies. Traveled the world. Had contacts in China, India and other global markets. Resources, connections, and access to market information that was hard to come by and held by few. When market consulting first started it was really all about these recognized analysts or experts. Some individuals took their experience and personal brand and established themselves quickly and have become household names on the farm. Others built companies and businesses using less experienced individuals in the field to carry one or two key analysts messages and recommendations. I was one of the first of those “less experienced” guys in 2008, I guess that makes me one of the most experienced now? Farmers sought help and found it in these resources which narrowed the gap between the global market place and the farm dramatically. The increased and accelerated flow of information was very beneficial, but farmers have challenges not understood by these guys who had spent the last 30 years a long way from the farm. It is easy to look at the market and recommend someone sell, but what if the product has yet to be produced? What if that production doesn’t meet spec down the road? What if you need cash and sales are not recommended? Selling 100% of production each year without weather, quality, storage, contract or other risks isn’t quite the same as what a farmer faces.
The next evolution of grain marketing was contracting tools previously not available or understood at the farm gate. Options, averages, floors with upside, trailing stops, collars, even pooling post CWB is still available. Valuable tools in the hands of expert traders now available and being promoted to farmers. These tools enable profit from market movement in either direction while limiting losses. Sounds like what farmers needed, doesn’t it? Don’t get me wrong, I am still a big advocate of these tools. Just always remember you are a farmer doing your best to establish the best price possible for your product. You are not a hedger, you are not a trader. Do not confuse the strategies.
This is about when I felt like I had it figured out. I had enough experience to interpret the markets. I was one of the best at using complex contracts. I had a resume that I though I could build a brand on, and I knew a lot of people in the business, on farms, and in the trade. There was over 10 million dollars of established market for Marketing Consultants, and still room for further adoption. It was time to go get my piece of the action and I don’t regret it.
The grain marketing segment of ag has not stop evolving yet, and the end of its evolution is about as immanent as the end of technological innovation (remember when GPS seemed like a luxury for the rich?). The most significant game changer for market analysts and farmers using them so far? The internet. Say whaaaat? Wasn’t that a 1991 game changer? No. For farmers to benefit like they are today we first needed cell networks that covered rural areas, then we needed to adopt and learn to use smart phones and social media. No farmer that I have ever known has said to me “I farm because I love sitting at a desk!”. Not every farmer has adopted or embraced smart phone use, but by far the majority now have. I know because I see you all on Twitter posting your first pass of seeding and harvest every year! Farmers now stay on top of not only market info, but all sorts of global news and advancements in agriculture all day everyday. The whole world of information is now instantly delivered right to the farm. It isn’t just that google is in every pocket either, they don’t need google. There are journalists who, through social media and direct email are delivering more information, faster than ever before. In fact I have to argue that we have over corrected the flow of information. In grain markets there are always buyers and sellers, there are always Bulls and Bears. The scope of influence in grain prices has broadened and accelerated with entry of hedge funds and small and large speculators. It could be Supply or Demand, could be weather, could be foreign exchange, could be actions of market participants themselves, usually it is a little bit of all of the above. Whatever it is on any given day influencing the market, virtually the whole world gets the information simultaneously so you can’t beat the house with information anymore. This avalanche of information has created information overload, paralysis by analysis, and all sort of behavioral human nature issues that are prohibitive of good marketing decisions. The most dangerous, obvious, yet not well recognized is confirmation bias. Google that. Every trader talks their position whether they know it or not. Every grain merchant I have met puts his Bear suit on before going to work every morning. Every farmer I know runs with the Bulls. You have never had better resources for good market decision making, but it still takes time, information needs to be filtered, filtering takes experience, experience teaches discipline, and it still isn’t most farmers favorite thing to do.
The next big challenge is to get farmers, handlers, processors, and consumers to the same table. We need to overcome the virtual connections where everyone puts their needs, wants and opinions out there for the world to see, only to be opposed or questioned by the other end of the food chain. We need to sit down together at the same table and work toward better systems, which are better aligned with everyone’s needs. I am not only referring to product selection. This isn’t about GMOs or organic. I am talking about money, product valuation and price discovery. If we want appropriate Supply and Demand reactions from both consumers and farmers we need to send accurate price signals to both ends. We need to understand one another’s challenges, needs, and risks and work together. Yes, farmers need to understand consumer trends and consumers need to understand farming processes. But it doesn’t stop there, there needs to be risk management changes to bring the ends of the value change together. I think we are getting glimpses of where we need to go, but we are a long way from our destination. For the most part we are using contracting tools, price discovery mechanisms, and pricing systems and processes created a generation ago. Deregulating the CWB and introducing hedging contracts is just the tip of the iceberg. The world has only virtually shrunk, we (farmers) are still a long way from end use processors and consumers. It is time to meet in the middle and figure out how to better financially manage farmers production risks AND end users supply risks.
I ventured out on my own because I believed I could provide the highest grain marketing value available to farm clients by helping them manage a complex part of their business. I don’t need to be in the center of the grain universe (Winnipeg) to be well informed. I am one of very few who has been dedicated entirely to grain marketing with a farmers perspective at heart for the past 15 years. I don’t carry habits from a generation of marketing in a different environment than we have today. I know the farming business as well as I know the grain business. Do you ever wonder why so many analysts sell 10% or 20% at a time? They are hedging their risk of being wrong, 10 chances to be right is better than 3. I don’t sell that way, I trust my analysis and I position myself and my clients accordingly. In the last year I have sold as much as the equivalent of 100% of a crop in a month. I have pushed forward contracting levels pre harvest, and I have held big amounts through to the very end of the crop year. My heart is on the farm, I listen to my customers and make recommendations that address not only price risk, but production risks as well. I am passionate about helping my clients make more money, my entire business revolves around it.