Maize producers and millers are vulnerable to volatile markets, affected by multiple factors completely out of their control. Ikageng Maluleke, an economist at Grain SA, explains how growers can mitigate some of the risks they are exposed to.
For new grain farmers, managing their risk can be a confusing, tricky affair. Maluleke advises that they join forces with more experienced ones, as minimising costly mistakes are of the utmost importance.
“Get a mentor or even join a small community of farmers or a programme like Grain SA’s farmer development programme. This is where you will advance your knowledge, share ideas as well as experiences. It is imperative that producers not make unnecessary mistakes, especially when starting out. This can be mitigated by getting a strong support system.”
Maluleke urges grain farmers to stick to their marketing plans so they avoid unnecessary loss. “Staying informed about the market will help ensure access to the information needed to take advantage of price movements. The marketing plan should also be reviewed and revised on a regular basis as supply and demand conditions change. Producers should remember that there is no one-size-fits-all solution for everyone and therefore should look at their own business needs.”
Why a marketing plan is important
Risk is ever present: There are many factors that can expedite risk in the grain sector, and of course the nature of the marketing will differ depending on the business type and business needs of the grower, miller or group. In this article, Maluleke provides a general description of the term “marketing”, and outlines what stakeholders in the maize industry need to know about it.
You want your crop to reach the consumer: Maluleke defines the term marketing as “the performance of all business activities involved in the flow of goods and service, in this case grains, from the point of initial production until they are in the hands of the ultimate consumer.”
You have limited control: She says that the kinds of factors that influence the grain market can often not be controlled by the farmer, so a solid marketing plan is needed to make sure they limit their risks as much as possible.
“We can all understand that a producer has no control over the weather, nor do they have any influence over the amount of volatility in the markets. Therefore, grain marketing is a key factor in farm profitability, and managing, developing and implementing a comprehensive marketing strategy is a critical step towards establishing a profitable farming business.”
Knowledge informs decisions: For a farmer to execute a marketing plan successfully, they need to arm themselves with information. “A marketing strategy will help you make rational marketing decisions, allowing you to manage price risk and improve market returns. To market successfully, a farmer needs to stay informed and remain flexible.”
Points to consider when creating a marketing plan
Maluleke outlines the following factors grain farmers need to consider when crafting their marketing strategy.
Production risk: Which crops have the greatest income potential within your crop rotation? What are the risks associated with producing that crop?
Market analysis: Make an informed decision by doing all the relevant research, and make sure to monitor the market so you know when to optimise your profits
Financial position: What are your farm cash flow needs? What are your production costs?
Marketing strategies: There are a number of marketing strategies available to reduce your risk, like using grain contract and managing storage.
Actions and timelines: What are your target prices, decision triggers and sales tools? Create a timeline and key responsibilities for implementing your marketing plan.
Marketing strategies are both based on your individual needs as well as the broader market. There are a number of tried and tested marketing strategies, depending on what you require for your business:
Store your harvested grain in cooperation silos to sell at a later stage when grain prices increase. This means you can get a higher price for your grain later on. The downside, however, is that you have no price risk protection, and that the cost of storage, grain handling and interest may not make the strategy worth it.
When taking out an insurance policy, we pay to cover our items just in case something happens to them. Insurers, using actuarial models, determine what those items may cost in future, and charge us a premium based on those estimates. With a forward contract, you agree to a selling or buying cost before you harvest, to protect yourself from negative dips in the market. The strategy is valuable as it helps you control and hedge price risk. But it also means that you are obliged to deliver the agreed upon quantity to the buyer, regardless of your production quantities, and that you are also not able to take advantage of positive spikes in the market.
When you have your own silos, you do not pay direct storage costs. You can also share in price increases later in the season if there is a high demand and you have produced enough grain. Of course, you would need to have enough money to actually buy a silo.
Silo bags are cheaper than actually purchasing a silo, which means you can still take advantage of price increases caused by later demand. Silo bags are not permanent, however, which means your grain can deteriorate if kept too long.
Use maize as animal feed
If you are a mixed farmer with both animals and crops, you may want to use your crops to feed your animals or sell it as feed to animal farmers during low maize price years. This way, you earn money from your livestock. The problem with this however, is that meat prices also fluctuate, so you have no guarantees that selling meat will offset low maize prize years.