Formulating a Winning Grain Marketing Strategy

By: Ashley Hoffman, GCC Grain Originator

Farming, like any business, requires a well-known understanding of an operation’s finances to make empowered financial decisions and effectively develop pricing targets/strategies. With the current volatile cash commodity markets, the time to know your breakeven point is now.
 
Breakeven analyses take into consideration both fixed and variable production costs to ultimately determine a minimum price level in which you cover all expenses or turn a profit. By arming yourself to make informed financial decisions, effectively look at marketing opportunities, and adjust your production plans based on anticipated financial returns, you help to ensure the long-term financial success and sustainability of your operation for generations to come. In regularly spending time assessing the business financials, you give yourself the ability to recognize areas where you could potentially decrease operating expenses and better manage your cash flow expenditures.
 
Many agribusiness groups and companies provide a variety of different tools and spreadsheets that can aid in calculating your breakeven cost, including your grain team here at GCC. Some general steps involved in the process of computing breakeven points include:

1. Identify fixed expenses: This can include land costs, equipment payments, insurance premiums, property taxes/upkeep, and base level utility costs.
2. Record variable expenses: Variable expenses include any expenses that vary with different production levels, like seed and tech fees, fertilizer, pesticide, equipment depreciation, irrigation expenses, labor wages/benefits, and fuel/lubricants.
3. Estimate crop yields: Based on your operation’s historical performance and the current growing conditions, estimate expected commodity yields. This will later translate to your potential return on investment.
4. Calculate the total cost of production: The sum of both your fixed and variable operating expenses.
5. Calculate your anticipated return per unit (i.e. per bushel or per acre): What amount of return do you expect to earn per unit of your production.
6. Calculate your breakeven point:

After you’ve calculated your operating breakeven point, it’s important to analyze and evaluate both the best- and worst-case scenario for your farm. What outcome would allow you to profit should yields and cash prices be above average, and what outcome would allow you to breakeven if you had to rely on payout from crop insurance? By planning an operating budget around your breakeven analysis, you’re better equipped to make a knowledgeable decision throughout the season. A major advantage to having a sound farm budget and accurate breakeven analysis is that it allows you to make the best decisions to effectively manage your risk through pricing plans and marketing strategies.

Every operation is different; therefore, developing a marketing strategy specific to your operation is dependent upon your own goals and when cash flow is most crucial. Are taxes due? Is land rent coming due to a landlord? Do you need to purchase a new piece of equipment prior to planting/harvest? Each a factor to consider that will ultimately dictate the timeframe in which some of your financial decisions are made. A robust and well-organized marketing strategy focuses on managing price risks and maximizing profitability/stability to allow you to operate with greater confidence – rather than predict future market movements.
 
Some important components to consider when developing your marketing plan:

1. Breakeven point: Allows you to set a minimum price level for your commodities to ensure you cover all production costs – prevents you from selling at a loss
2. Historical data: While market conditions are always fluctuating because of global production and geopolitical concerns, commodity prices tend to follow a pricing pattern over the fiscal year. By familiarizing yourself with these trends, you can set budgeting targets that effectively support your financial goals
3. Time-based targets: Set time-driven targets throughout the fiscal year that allow you to have a desired grain volume priced/sold (i.e. 3-6 months prior to the next fiscal year, 40% sold)
4. Risk management: It’s important to consider different scenarios that will best allow you to adapt to market fluctuations/uncertainties and optimize strategies to best mitigate risk

Knowing/understanding your breakeven cost and creating a marketing strategy is essential for a farmer’s financial success. By knowing your breakeven point, you ensure that all production costs are accounted for, giving you the tools to make informed decisions that are most pertinent to your operation. When combined with a well-thought marketing strategy, having such knowledge better gives you the ability to navigate volatile market conditions, secure more profitable commodity sales, and mitigate some of your risk. When consistently and thoroughly analyzing these factors, you position yourself and your farm for long-term sustainability and maximized returns.

For more help working through calculating your breakeven point and putting together a sound marketing strategy, please reach out to one of the members of your GCC Grain Origination team! We’re here to help you develop a marketing plan that best fits your operational needs.