To make optimal decisions, you need to make informed decisions.
To make informed decisions, you need to comb[y]ne all your key information in one place.
You may have seen Combyne’s slogan, “Optimize the Value of Every Bushel,” and wondered what it means. It doesn’t mean hitting a maximum price. Rather, it means achieving what’s optimal given individual circumstances – needs, goals, capabilities and preferences of each individual farm operation. Ultimately it comes down to making the most informed crop marketing decision that best suits your farm.
So how do we define what’s optimal? In our view, there’s two big buckets of factors that influence optimal decision making for crop marketing.
1) First, there’s market-driven factors, which a farmer basically has no ability to proactively shape. The best approach is to make informed decisions about marketing their grain against what’s available to them in the market. These are things like finding optimal bids, factoring delivery location distance from the farm (and associated transportation costs and net back price at the farm gate), leveraging any on-farm storage to capture the carry in the market (higher prices for future delivery) vs. paying for the cost of storing grain (and immobilizing working capital), and understanding premiums and discounts for quality.
2) Then there’s factors unique to each farm. These include how much storage capacity a farm might have and how to best leverage the flexibility it provides, individual understanding and tolerance for risk (whether production risk or price risk), specific cash flow needs, revenue recognition and tax optimization opportunities, etc.
Our goal is to sort through all this information and sets of individual factors to help farmers make more informed crop marketing decisions. By simply “comb[y]ning” the information they already have, we can help move farmers from being perhaps in the bottom half of marketers to the top second or first quartile. At that point, we’ll know we’ll have had a big impact.
Let me be clear! We have a long way to go before we can deliver against that vision. But by starting small, working alongside farmers who believe in our vision, and figuring things out that deliver incremental value one-by-one, we think we can get there.
We like to think about our two data structures in terms of “how much you have or might have to market” and “how much you’ve committed or already priced.” The former is basically inventory – whether it’s anticipated grain you’ll have to sell (based on acres and expected yields), or as-harvested and stored inventory (whether stored on-farm or off-farm). What’s committed or priced is basically your cash contract position – whether forward or spot contracts. For some farmers, this also includes hedging price risk with futures and options without committing grain for sale in the cash markets. The combination of these two core sets of information gives you a foundational view on what you have available in any given crop year, what’s already committed (and under what terms), and the balance that’s left to price or sell to someone.
This is what I would call the basic level of making informed marketing decisions. Just from this, we can help provide an up-to-date view on marketed positions (% sold), average weighted price for contract commitments so far, floor-prices stemming from any hedging activity, forward-looking views on incoming cash flow from grain deliveries several months from now, and how much grain remains unpriced and what it’s worth in total. This is where we get into the financial insights and innovation that we think can provide powerful ways to optimize revenue and risk at the same time.
We started simple by focusing on tracking overall farm-level inventory, whether projected or as-harvested. For farmers with on-farm storage, we also added a simple virtual bin yard. As for contracts, we started with the more simple and common type – fixed price cash contracts – both forward and spot contracts. Based on feedback from farmers who see where we are going, we will shortly be adding additional contract types to track – think basis first, futures first (HTA) and targets. As always, feedback on how to best do this or improve it once it’s launched is much appreciated and valued.
There will always be things that one cannot control, but when focusing on what you can control, and unifying your information in doing so, you can make more informed decisions, and in the process start to optimize your decision making between revenue and risk trade-offs.
How do you define optimal for your farm? On our farm, we also feed a lot of cattle – so we like to pair back the volume of grain we market as cash crop until we are certain of our feed inventory levels – we’d rather miss out on a good forward price knowing we are certain to have enough feed for the herd. But there’s no right answer to this question – it’s just what’s optimal for us.
What about you? Do you keep some old crop in storage to cover any shortage on new crop forward contracts as a form of self-insurance? Do you forward-contract while keeping your crop insurance coverage level in mind? Does selling in regular increments through the winter months help to average your price out?
We’d love to hear from you as everyone has their own way of thinking and managing; that way, we learn a thing or two ourselves.
Follow our blog so you can stay tuned for the second addition of my blog series, and continue to learn how to optimize the value of every bushel you grow and sell. My next post will cover the importance of digitizing information in agriculture and the ways that Combyne is approaching this challenge.
By Alain Goubau April 19, 2023
Optimization follows the digitization and unification of all relevant information.