Farm profit-maximization in western Canada : process, pricing, and planning in the marketing of commodity crops
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Date
2006
Authors
Tjaden, Brenda
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Abstract
Ideally, a farmer would sell all of his or her crops when the market is believed to be peaking, at a price representing a profit to the farm. In practice, there are constraints to doing so including the fundamental challenges of choosing the most profitable crops and predicting the direction and magnitude of price changes. This study builds on the knowledge base of 'what farmers are doing' when they market their crops, and develops a planning framework that can act as a bridge between the farm and the next-use markets in western Canada. The research into farmer marketing behaviour has revealed that sales activities are driven both from the need for the farm to sell to generate movement or revenues, i.e. the 'push' from within, and by sell signals and pricing opportunities, i.e. the 'pulls' for crops to be sold off farms that come from the marketplace. To frame the specific situation Prairie farmers face as they approach the marketplace, the study begins with a review of the commodity crop pricing systems currently in use, the industrial change that has taken place in the grain handling industry recent years, and how these impact farmers' position in the marketplace. To clarify the focus of this research and to set the stage for the commodity-specific and farm-level analysis of marketing activities that follows, the theory of farmer utility through profit maximization is then developed, with a model that acknowledges the influence of non-monetary factors in farmers' decision-making process, and the market imperfections they face in attempting to analyze prices and decide when, where and how to sell the various crops. Finally, a framework is offered for building and executing a marketing plan that takes into account the internal, farm-specific realities of marketing to maintain the crops' quality and pay the bills, and the external market information farmers have access to in attempting to capitalize on trends and variability in the prices. This research has uncovered a number of improvements to the marketing process that farmers might profit from. Selling for internal farm-related reasons rather than in response to market signals is not ideal, nor is marketing to maximize revenues rather than the profitability potential of the individual farm. Hedging, pooling or any other standard risk management mechanism will not work in isolation for a typical farmer that has diversified into crops that trade in differently-structured markets. Farmers must realize that they alone bear the risk of farm failure and that their 'partners' in the supply chain are not always positioned to operate in their best interest. For these reasons and others related to personality and individual risk tolerance, only a unique marketing plan devised and controlled by farm managers themselves, will work to optimize marketing decisions and maximize profit potential. The grain industry on the whole, farmers as well as other interested parties, could also benefit from clarifying the goals and dialogue surrounding marketing systems in this respect.