Jon Knutson, Published March 08 2009
Grain marketing is important but complicated
Inside the Buffalo Community Club, 40 miles west of Fargo-Moorhead, a dozen farmers weighed marketing strategies that could determine whether they make money on the crops they raise this summer.
“What we’re doing is going to be so much more important in 2009,” Hattie Melvin, who leads the Buffalo Marketing Club, told other club members.
Deciding when to sell their crops always is a big deal for farmers. But the job is crucial this year.
Crop prices were high enough in 2008 and 2007 that farmers with good yields generally made money even if they didn’t market well.
Prices are much lower this year. Producers will struggle to be profitable if they don’t do a good job of marketing.
“Farmers’ (profit) margins are being squeezed pretty thin. They need to find marketing opportunities,” said Frayne Olson, grain marketing specialist with the North Dakota State University Extension Service.
Volatile crop prices, caused in part by the global economic crisis, further complicate marketing.
“Producers haven’t had to deal with this level of volatility before,” said Amber Knudsen, agricultural products manager for Omaha, Neb.-based DTN, which provides marketing services and products.
As a result, more farmers, especially big operators, are becoming DTN customers, she said.
One example of the increased volatility:
In 2008, the average monthly per-bushel price of wheat in North Dakota varied from $12.80 to $6.82, a change of $5.98.
In 1999, the average monthly per-bushel price of wheat in the state varied from $3.14 to $2.52, a change of 62 cents.
In other words, the per-bushel price fluctuation was nearly 10 times greater in 2008 than in 1999.
Good for economy
Farmers’ success at marketing can have a huge impact on the region’s economy.
Agriculture accounts for about 25 percent of the economic base in North Dakota and Minnesota.
What’s good for farmers is good for most other area businesses – and the people they employ.
Last year, for instance, North Dakota produced
311 million bushels of wheat, according to the U.S. Department of Agriculture.
A modest dime increase in the average sales price of that wheat would equate to $31 million more for the state’s economy.
Note the “average” in the sentence above.
Farmers too often try to “time” the market, or sell all their grain at what they believe will be the top price for the year, said Ed Usset, a University of Minnesota grain marketing specialist.
“They’re looking for the high,” he said.
Producers should look instead to a number of small sales producing “a good average price” that will give them a profit for the year, Usset said.
An essential part of the process is adding up the cost of things such as land, seed, fuel, fertilizer and equipment to determine the per-bushel cost of production, Usset and others say.
Farmers shouldn’t even think about marketing grain until they know their per-bushel production costs, experts say.
It’s no easy task
Marketing crops is tricky and unpredictable.
The weather determines yields, so farmers don’t know until harvest how much grain they’ll have.
Selling grain in advance of harvest is risky.
If yields are poor, the farmer might not have enough grain to fulfill his contract. If so, he’ll need to buy grain on the open market – possibly at a higher price than he sold it for.
It’s also risky to wait because prices can fall.
The past year is a perfect example. A bushel of wheat fetched about $12 a year ago, about $8 in August and about $6 now.
The reverse was true in 2007. Many farmers profitably sold a portion of their crops before harvest at $5 and $6 per bushel, only to watch prices soar to more than $10 per bushel later.
“In 2007, farmers sold the bulk of their crops too early, and in 2008 they sold too late,” said Mike Krueger, president of The Money Farm, a Casselton, N.D.-based grain marketing advisory service.
Farmers shouldn’t be expected to be expert grain marketers, he said.
“They’re producers. Raising grain is what they like to do,” said Krueger, who’s been involved in the grain business since 1974.
Marketing grain is far more complex, involving everything from the global economy to weather in top crop-producing countries.
Given the complexity, even marketing specialists can disagree on what to expect, Krueger said.
Lots of shiny bins
A common marketing strategy is to store grain until prices are better.
That helps explain why the region’s grain storage capacity is growing.
Storage capacity in North Dakota rose from
880 million bushels in 2002 to 1.05 billion bushels in 2007, according to the USDA.
Minnesota’s capacity rose from 1.5 billion in 2002 to 1.8 billion in 2007, the USDA said.
Grain elevators traditionally store grain for farmers, charging a few cents per bushel per month.
Elevators still store grain for customers, but the focus is changing to on-farm storage, said Bob Zelenka, executive director of the Eagan-based Minnesota Feed and Grain Association, which represents Minnesota country elevators and feed mills.
“Farmers are doing a lot more themselves,” he said.
Adding storage allows producers to do a better job of “controlling their market” by selling when they want to, not when they have to, said Steve Haman, director of business development for Northern Grain Equipment in West Fargo.
On the front lines
The Buffalo Marketing Club was launched eight years ago with help from the North Dakota State University Extension Service.
The club has 15 members, all farmers from the Buffalo area, who each pay a $50 annual fee.
They meet weekly at the Buffalo Community Center – early mornings during the summer, afternoons in the winter – to analyze the commodity markets and consider strategies.
A stuffed buffalo head is mounted on the wall of the community center, a glass case filled with trophies from the old Buffalo school sits in a corner.
At a recent meeting, club members – armed with pop, coffee, cookies and popcorn, and sitting on metal folding chairs around heavy plastic tables – talked about the struggling world economy.
If foreign customers don’t have the money to buy U.S. grain, exports will suffer and the value of crops raised by club members will drop.
Melvin, the club leader, reminded members about the importance of knowing their per-bushel production cost and selling at a profit, not what they hope is the high price for the year.
“Learn anything?” club member Tim Berntson jokingly asked a visitor after the meeting.
Berntson, 40, began farming in 1991 and started getting serious about marketing a decade ago.
Raising crops is enjoyable, he said,
“But marketing can be harder. It hurts more when you leave something on the table,” he said.
He and many other area farmers were hurt in the summer of 2007 when they sensibly sold grain at profitable levels, then watched prices rise even higher after harvest.
Now, Berntson is trying to do what makes most sense in current conditions.
“We don’t know what the future will bring,” he said with a rueful smile.
“We’re just trying to make the best decisions we can.”
Readers can reach Forum reporter Jonathan Knutson at (701) 241-5530