For a number of important reasons, Family Farms, LLC recommends working closely with a crop sales advisor. Nonetheless, a producer must be comfortable with risk management decisions made and the implications of the pricing tools used and develop an overall revenue outlook. After all, the producer has more to gain or lose than any advisor.
The terms of these programs vary.
Grain elevators have developed some creative programs that allow farmers to set a floor price on a defined quantity of grain but still participate in the expected upside that may develop based on planting delays, adverse weather, a resolution of trade disputes, etc. Some programs may offer an up-front price bump or allow the base price to move up to a certain level. Some bear the hedge cost burden rather than placing it on the producer, which could be quite valuable in a volatile market, eliminating the need for a separate hedging line of credit. A crop sales advisor may not be perfectly up to date on every iteration of the many different elevator offerings, but they can integrate them into a marketing plan.
Understand the specifics before you sign.
These programs often sound great on the surface, and many of the offerings genuinely fit well into a producer’s overall marketing plan. However, producers need to have a clear understanding of how these tools work, what they cost, how they change over time, and how a combination of these programs, whether with the same or different elevators, could be either more or less beneficial for their operations.
Whether a producer is a seasoned veteran or a beginner, there is no shame in saying to a merchandiser, “You need to walk me through this again.” It is much better to ask what feels like too many questions than to be stuck with a contract you don’t fully understand. If a merchandiser is throwing around terminology that you don’t perfectly understand, say so. Ask to see some written examples of how the contract is expected to unfold, both in the event that grain prices go up and in the event that they go down. When a producer participates in a variety of these programs, It is easy to lose track of the price effects and of the bushels that may or may not be committed.
Understand what can go wrong.
It’s essential that you understand the price triggers that would cause changes to bushel volume or overall program price. Make sure you know the answers to questions like these:
- What happens if the price soars higher than it was supposed to? Is there a “double-up” feature that might commit producers to far more bushels than they are comfortable locking in?
- What might happen if the price drops further than anticipated? Is there a “knock-out” feature that stops pricing on any additional grain?
- Can you get out of an elevator program if you need to? Is there a cost for that?
A crop sales advisor looks at these scenarios and can make recommendations to help producers protect profitability within the constraints of the elevator programs. Conversely, the elevator merchandiser may or may not be as able to advise producers about what to do as the crop year unfolds. After all, it’s the merchandiser’s job to get you into one or more of their programs. Even when they have the best of intentions, it is your job (with the help of your advisor) to figure out how to best manage those programs.
FamilyFarms Group helps families stay on the farm for generations to come by helping them build the most profitable and sustainable operations possible. Our management solutions can help you optimize your crop sales strategy and improve your operation’s profitability.