Marketing is as diverse and complex as the agricultural industry. Every farm has a different marketing strategy and often each crop is marketed differently. Marketing is also difficult to simplify for the purpose of a blog post, but I am going to try to give a glimpse into the marketing side of agriculture. The marketing side of agriculture is one of the first steps in the supply chain between farmers and consumers. Marketing strategies can vary even within a family, depending on your personal appetite for risk and your personal preferences. I will walk you through a few of the main marketing strategies and contracts, our marketing strategies and options for our various crops as well as provide information on other crops.
Agricultural marketing is dominated by contracts, but those contracts vary widely depending on the crop. Agricultural marketing is often done through the Boards of Trade, in the United States the two main groups are Chicago and Kansas City. Spring wheat is traded on the Minneapolis Board of Trade and wheat from the Pacific Northwest is often traded on Portland’s Board of Trade. We sell all of our winter wheat based on the Kansas City Board of Trade prices. Corn, soybeans, canola, oats, soybean oil, hogs, and cattle are examples of some of the other commodities that are priced through the Boards of Trade.
Our “niche” market crops, which includes sunflowers, safflower, and malt barley, are all marketed using individual contracts. Each crop is priced through a formula utilizing various Board of Trade prices, current market indicators, and supply forecasts. Whoever we are selling to designs their contracts to meet their needs and publishes a price. In the case of malt barley a malt house will offer contracts with specific specifications including: total bushels, acres, and variety. For example, we will get a contract for 500 acres, at 50 bushels an acre for a total of 25,000 bushels of the Hockett variety. These contracts all include a key clause called the “Act of God” clause. This means if we do not raise all 25,000 bushels we have contracted we are not required to fulfill that contract.
Cattle and other livestock can be sold in a variety of ways, however they are predominantly marketed through sales. These sales can occur in the Public Auction Yards, through sales at individual ranches, or video auctions. Contract specifications for young cattle (bound for the feeder market) usually have a required delivery date, weight, and a sliding scale if the seller fails to meet that weight. If a buyer has contracted their feeder calves prior to weaning they will also pay a small percentage down on the sale. The buyer has a minimal obligation to follow through with the sale, but they will lose their 20% down if they back out. Typically backing out on a sale is rare, but can be a problem in a volatile market situation when a buyer bought cattle before a significant drop in the marketplace.
Other crops and a certain number of livestock sales are marketed between farmers. Officially all of these contracts are referred to as “private treaty”. We market all of our hay directly to other farmers and ranchers as well as some of our corn. In this case we simply agree on a price between the two parties, agree on terms, and agree on a required down payment.
Wheat Marketing Strategy
A typical marketing strategy for commodity crops such as wheat, corn, soybeans says you should have a certain amount of your crop marketed before you put the seed in the ground, around the middle of the growing season, and after harvest. The percentage for each of those time frames varies depending on who you ask. There are thousands of marketing companies, training sessions, and marketing advice available to farmers. We honestly do not have a set marketing plan, I largely market on my gut instinct, as well as an ability to be satisfied that I marketed our crop at a profitable price regardless of future increases in market value. The picture below the current prices for hard red wheat on the Kansas City Board of Trade, as you can see by the green number it has been a good day for the markets. We typically trade on Sept, Dec, and March contracts however we have been known to unload the last remaining bushels of the previous years crop on July contracts.
We typically use forward contracts (also known as hedge to arrive) through our local elevators. The local elevators will price wheat for delivery in a certain time frame and base the price off of the KCBOT contract for that time frame. For example this year a lot of our wheat is contracted for December delivery so it was priced using the DEC18 contract on the KCBOT. The elevator also applies a “basis” to the KCBOT price to get to the cash price they are offering. When we sell forward contracts we have the option to “price” them and lock in the cash price or simply contract the contract price and lock in the cash price later. The basis varies from elevator to elevator and from state to state. This year we have seen unusually favorable basis prices in December so almost all of our contracts are locked in at the cash price. Here is a short summary of basis prices from Montana State University.
Other marketing strategies for wheat exist, one of the more popular is to have a company market for you. In many cases a local elevator company or co-op will market your wheat for us using various program offerings. In this case a farmer agrees to sell X amount of bushels and the elevator company or co-op will spend the next few months looking for marketing opportunities for the crop. Many producers have had good luck with these programs and have received prices they were satisfied with. We have tried these programs occasionally however the prices never matched our top contracts that we had through our own marketing.
I refer to our malt barley, safflower and sunflowers as niche marketing simply because they are smaller volume crops and have specific contract requirements. Each of these crops has a specific quality element that are detailed in the contracts. Malt Barley requires specific protein, plumpness, moisture, as well as a few other quality specifications. These are required because the malting process requires certain quality, varieties, and quantities for each individual customer. Malt barley contracts are some of the most specific contracts we have. Each contract also contains the critical “Act of God” clause. We contract all of our malt barley ahead of planting, the malt houses will offer contracts in mid-January, and we will lock in acreage and production then. These contracts also have requirements for variety, the use of certified seed only, and post harvest storage. Unfortunately this year there is a glut of barley supply which caused the company to cancel all of their dry-land barley contracts, this left us without the ability to raise barley. Malt barley is risky to produce “off contract” as there is no assurance that anyone will buy it from you, regardless of quality.
Our safflower and sunflower are similar to the malt barley contracts, however these two crops are not as risky to raise without a contract. It is not unusual for us to grow sunflowers and safflower without having a contract at planting. These contracts do typically stipulate the specific variety, certified seed only, and delivery specifications. They also will include requirements for quality if the contract is for the oil market as opposed to the birdseed market.
Niche contracts also often include a “freight on board” FOB stipulation that either requires us to delivery the product to their facilities or they are price FOB on farm meaning the company will come to us. FOB on farm contracts are valuable and have allowed the increase in niche crop acreage as it moves the market to us as opposed to having to move our products several hundred miles to “local” facilities.
Cattle are often marketed through the local sale barns and sold at auction. The auction can include anything from feeder calves, heifers, steers, and bred cattle. For many years my husband’s family marketed their calves every fall by selling them through the local sale barn. Recently we have started contracting them with a neighbor who runs a local feed lot. In this case we determine an agreed upon price as well as a shipping date a few weeks before we wean our calves and take them a few miles down the road. This has allowed us to decrease the time to market, as well as increase our gross profit because we are not losing a small percentage of our cattle sale to the sale barn commission.
Our neighbor in turn feeds these cattle to a certain weight, usually 200-300 more pounds, and sells them again into the feeder market. Officially these calves are called “background” cattle while they are at the feedlot. Depending on the situation anyone backgrounding cattle will either have a contract set up for their sale or they will be priced the day they leave the feedlot. There are various ways these contracts can be structured.
We still sell any of our cull cows and bulls at the local sales barn as the market for them is limited. Bred cattle, which we do not sell but we buy, can also be bought in the local sales barns but you risk unknown genetics and quality. We typically either buy our bred cattle through private treaty contracts with a local neighbor or through private auction sales. Many of the large ranches will have all female sales in the early fall featuring bred heifers and young cattle as well as bull sales throughout the fall and winter. These sales feature high quality genetics from either registered or commercial herds.
Private treaty is term that is rarely used outside of the livestock industry but it still is the nature of any contract between farmers. We sell all of our hay through private treaty sales and as mentioned above have bought cattle and bulls through similar agreements.
In the case of our hay we typically have a standing agreement with a local sheep and cattle rancher for the bulk of our hay production. Once we meet his needs as well as ours we sell the rest of our hay to other ranchers. We typically price our hay at the start of the haying season with our main customer and then adjust our prices for any excess depending on the market at the time of the sale. We add additional charges per ton if we are going to deliver the hay to their ranch or if they are buying it “out of the field” and will provide their own trucking. These private treaty agreements are typically not in writing however we generally require 50% down before we will deliver any hay, particularly to a new customer. Once long standing relationships have been established we will negotiate on the 50% down requirement. There is substantial risk in private treaty contracts of this nature because we have little recourse if someone does not pay and we have delivered their product which is why a down payment is required.
Corn is typically marketed through the Chicago Board of Trade or in the midwest to ethanol plants (using a pricing strategy based on the CBOT) but in our case we often sell it private treaty to local ranchers. We can sell it through one elevator in Montana and they always contract FOB on Farm, but it is generally easier to contract it with local ranchers. This also allows us to remove a negative basis price from the contracts, we typically take the current CBOT price and agree on that price with our customers. If they want the product delivered we will add a small delivery charge per bushel to the CBOT price depending on travel distance.
What about other farmers and areas?
I asked a few farmers on social media how they marketed their crops. This survey provided a little bit of a broader reach for myself as well as provided some information on other niche crops. Many of the farmers who responded market their wheat, corn, and soybeans in a similar fashion to our wheat marketing strategy. The wide variety in marketing strategy came when producers commented on their marketing strategy for fruits, vegetables, organic products, and other niche crops.
Many of the fruits and vegetables are contracted directly to grocery stores. For example in Idaho one farm will contract their apples and other products utilizing an inside salesman with Fred Meyer, Kroger, or Walmart. In many cases vegetables are contracted 100% before the growing season, much like we will contract all of our malt barley before the season. Grapes are contracted directly to wineries and all of the contracts are typically done before the season. Grapes are also similar to malt barley in that wineries are going to require specific quality and varieties to produce their wines.
I was surprised to hear from one of my friends in Canada who has an organic farm, they contract with various companies throughout their local area. Their contracts do not include an “Act of God” clause. Their operation spends a significant amount of time marketing by contacting local elevators and co-ops to see what contracts they are offering. In their area many of the very large farms outsource their marketing and pay agricultural marketing companies to do all of their marketing for them. This method frees up time however the marketing strategy has to produce prices that cover the cost of the marketing firm.
Other farmers are direct to consumer either through vertical integration, meaning they raise their products and produce the finished products themselves, farmers markets, or other private treaty agreements. There are numerous examples of vertical integration including Wheat Montana, High Five Meats, and Anthony Road Wine Company.
Marketing strategies are as diverse as the many farms across the nation. This blog honestly did not even begin to scratch the surface as there are major crops left out including cotton, peanuts, and rice, however hopefully it will provide some insight into the process. Marketing is the one of the first steps in the extended supply chain that eventually delivers high quality products to our consumers. Please leave me comments, reach out via social media or email with questions or if you need clarification. Marketing is exceedingly complex and can be difficult to simplify into a blog post.