How to Buy Grain from Farmers

It is only half-true that trading margins are optimized by buying cheap grain. Collaborating as partners reduces transactional behavior and creates positive feedback loops in service and loyalty.

Background

When farmers sell commodity grain it’s referred to as ‘marketing’, even though there’s no storytelling or product differentiation involved. Grain marketing is simply fixing the price on a certain quantity in a contract with a buyer.

Typically, farmers can store some, but not all, of their crops after harvest. Lack of storage and cash flow creates pressure to liquidate inventories. Pressure is often the single biggest influence in farmers’ grain marketing decisions, along with anxiety about price volatility.

Looking across the commodity grain supply chain from end to end, it’s hard to find a pain point as intense as the transaction to the first off-farm buyer. The stress of grain marketing is there every day of the year, and a farm’s performance determines crucial outcomes like income and solvency. As Ariel Patton explains in Topsoi,

Crops grow where cash flows

… farm finance is a bumpy road.

The Nuts & Bolts of Price Discovery

With futures-traded commodities (corn, soybeans, wheat and canola, for example), the futures and basis portions of the price can be fixed all at once, or at separate times, depending on the producer’s market outlook. Cash-traded commodities like barley, peas, sunflowers, and many others move up and down over time in response to supply and demand.

A supply and demand table (S&D) is a critical tool for grain buyers, because the markets are influenced by both static and dynamic forces, requiring constant review and adjustment of changing variables. An S&D is a formulated spreadsheet that allows an analyst to adjust one variable at a time based on new information, and interpret the impact across a large number of inter-related market influences.

The key to grain market forecasting lies in how confluent static and dynamic variables at play in grain markets are built into the S&D structure. Crops are harvested all at once in a short window and added to the stockpile left over from previous seasons to establish that year’s supply. From that point on, a steady stream of export sales and domestic processing gradually draws down inventories.

• What’s forecast to be left is either enough or not enough – this is market sentiment.

• Traders express their consideration by buying and selling - this drives price direction.

Commodity market speculators like hedge funds, in addition to commercial traders, are active participants in futures markets for grains, causing them to overshoot at times. That action is accommodated for in the basis.

A Counter-Cultural Innovation Opportunity

There is a very low level of trust between grain producers and buyers, due to an imbalance of power that swings back and forth, year in and year out, depending on whether there is a shortage or an excess of grain. Historically some governments have tried to control this with monopoly marketing agencies like the Australian and Canadian Wheat Board’s. Farmer collective marketing cooperatives have also been attempted, but all eventually morphed into regular grain companies through mergers and acquisitions.

The latest is the Viterra-Bunge deal. Viterra’s origin are the Canadian Prairie pool elevator cooperatives that were merged and consolidated throughout the 1990’s and eventually bought by Glencore. Bunge bought into the post-monopoly voluntary Canadian Wheat Board together with a Saudi sovereign wealth fund to create G3, a modern grain company that is partially owned by farmers through share transfers tied to grain deliveries.

Australia’s GrainCorp is another example of a former cooperative that has been consolidated, expanded and aligned with other global trading entities. And Minneapolis-based CHS Inc., which started as Harvest States, is now “a Fortune 500 secondary cooperative owned by United States agricultural cooperatives, farmers, ranchers, and thousands of preferred stock holders.”

Some would argue that it is this consolidation, together with the repeated failure of farmer collective marketing efforts to succeed on their own, that is behind farmers’ mistrust of grain companies today. At the same time, grain farming communities are far away – both physically and culturally – from consumers, which feeds the suspicion of what’s happening in between.

The opportunity at hand in this node of the supply chain is to offer transparency to grain producers and reverse the historic secrecy around economics beyond the elevator. Traders used to refer to this as ‘the mushroom strategy’ in getting farmers to part with their grain – cover ‘em in sh*t and keep ‘em in the dark.

Over the years, farmers learned to respond dishonestly right back. They are known to default on contracts, misrepresent quality, fudge with weights, etc… all tricks of the trade that regularly occur from one end of the grain supply chain to the other.

But as ADM is learning, sharing is caring. This trading team’s transparency project is the clearest example that has emerged thus far in the grain business of a project to tackle the S in ESG.

Where To From Here?

Today, there is no shortage of information available to anyone who wants to buy and sell grain, but the skill of synthesizing it all and building a marketing strategy around it is uncommon to find outside of a grain company. Agriculture universities only teach a small fraction of the steps involved, leaving wanna-be grain traders to learn to the tools of market analysis on the job.

New entrants in the grain industry typically start by acquiring the talent to maneuver through the ups and downs of price discovery. The opportunity now is to do so without bringing along the toxic culture that leaves farmers feeling cheated and misunderstood.

Would it be possible instead to make farmers party to the overall success of the grain supply chain? If treated with openness and professionalism, could a grain company help ease fears of sharing data around field activities?

Farmers’ production data could be worth more than the grain itself someday. It won’t be monetized without trust.

A Small Glossary of Terms

Basis is used to adjust the macroeconomic equilibrium price for a commodity back to a level that makes sense to transact at in a specific location. The delivery window for grain and the cost of transportation to its next-use market adjust the price that an individual grain elevator can pay on any given day.

Grades are used to assign premiums and discounts to the base price of grain based on standard quality attributes. Factors such as the weight, size, discoloration, and protein/oil content of the kernels are measured at the time of delivery and then used to refine the final payment.