Are they the same thing?
|Cullen Wilson||Oct 18|
by Cullen Wilson 10-18-19
I had a great dialogue with a reader this week about the previous newsletter. One thing that came up in the conversation is the growing desire of farmers to market grain like an elevator. That’s a great goal. That desire demonstrates farms want to run their farms like a business. Its a good trend.
There is jargon or a language to grain merchandising and grain marketing. And not every market participant has the same knowledge and definition of the terms. I think its important to define terms so all involved can gain a level understanding of the terms of the trade.
I propose that farms perform grain marketing. Grain elevators perform grain merchandising.
Grain marketing and grain merchandising have many similarities but are not the same thing.
Lets define the terms.
Grain Marketing- when a producer sells his/her crop for the aim of generating revenue above the cost of production.
Grain Merchandising- the process of physically collecting (purchasing), distributing (selling), transporting commodities to deferred time periods or demand markets for the aim of positive margins using the tools of futures, basis, space (bins) and freight.
What is similar?
Both involve the same commodities. Both can utilize basis and futures. Space and freight can be used by both. The farm and the elevator are both seeking profit.
Small difference but different outcomes.
A key difference in grain marketing versus merchandising is the inputs into the profit equation. A producer enters the market by land costs, inputs and overhead. A merchandiser (elevator) enters the market by purchasing the commodity plus overhead.
How one enters the market makes a huge difference how profit is generated.
Both farmer and merchant have to overcome their overhead costs but their inputs to their businesses are different. Farmers inputs are land, money, labor and crop inputs. His output is crops or grain. Merchandisers inputs are a commodity, money, space, futures spreads and freight. Merchandisers output is the commodity in a different time-frame using futures spreads or a distant demand market using freight.
There is a case that farms can use futures spreads, space and freight the same as the elevator so the elevator is becoming irrelevant. The trend of on-farm storage has impacted the elevator, no doubt. The farmer is grabbing for merchandising skills when he starts using bins. His cost are still derived from land costs and crop inputs. If he adds bins and freight he is adding to his cost. He will need to get a certain return-on-investment on the added inputs to make it worth his while. That requires merchandising skills. But it still doesn’t change the fact he has to generate a revenue above the cost of his production and merchandising endeavors.
Elevators offer a service of physical delivery and immediate revenue source to the farm. The merchandiser receives the commodity, uses bins, futures and freight to get the commodity to a different time frame or locale where the commodity is needed.
The role of the elevator is changing but the function is still purchasing commodities and merchandising those with space, time and freight as a service to producers and users. The farm is growing its merchandising skills to increase its revenue potential. (Both reasons I started this newsletter).
As long as…
Farms are adding merchandising skills but are still primarily performing grain marketing. Elevators are adapting to trends but are still merchandising grain to fill a need in the marketplace.
Grain marketing and merchandising are similar but not the same thing.
As long as producers produce crops they will need to generate revenue over costs. As long as crops come in October; producers need money in March: and users need grain in August there I will be a need for merchandisers/elevators.
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Cullen Wilson is a grain originator and leads a team of originators at Dakota Plains Ag Center, LLC in Yankton, SD. The opinions stated in this newsletter are his and not that of his employer or affiliates. You may contact him at email@example.com . Follow him on twitter @cullenjwilson
This newsletter expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. The newsletter is being made available for educational purposes only and should not be used for any other purpose.
Copyright © 2019 Cullen J. Wilson. All Rights Reserved. Information provided is general in nature and is provided without guarantee as to results. The information is not intended to be, and should not be construed as, trading, financial, insurance, legal, or tax advice. The author, its subsidiaries, and affiliates disclaim any liability arising out of your use of, or reliance on, the information.
Your situation is fact dependent and you should seek appropriate advice.
10 Proposals for Grain Marketing Article LINK
1. Plan crop year grain movement
2. Establish a crop year cash flow plan
3. Set a revenue-per-acre goal. Article Link
4. Connect grain movement, cash-flow and revenue goals with firm target offers or open orders
5. Commit to a Ulysses contract, no more that 20% of production Article Link
6. Build a crop peril contingency plan with crop insurance and working capital
7. Identify relevant markets in proximity to the farm and build relationships there Article Link
8. Chart working capital monthly. Harvest Profit Blog Link
9. Track current revenue-per-acre, bi-weekly. Article Link
10. Record, reflect and adjust