Crops Insights

How market opportunities affect choices for new crops

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New crops mean finding a new market. This could mean many different end markets depending on the crop, so it is worth doing your homework on the general factors that affect the price of the crop. Look at things like local and regional supply, as well as end-market uses (feed, food, processing).

What to think about

First, ask yourself:

  • Is there a buyer for that crop either locally or outside the local region (but paying a premium price that netbacks to your farm gate price)?
  • Do you need to find a buyer ahead of time, or is there enough of a base demand that if you grow it, you will sell it?
  • How does the availability of a market to sell into affect your thinking?

If the crop has a definite local market and demand is there, but there is little to no local production, it should be easy to sell it in the local market if you can produce it. But just like any other crop, it means you have price risk if you don’t use a forward contract to lock in your price ahead of time.

If you have decent certainty on being able to sell but are worried about the ability to produce because it’s a crop you aren’t familiar growing, or you are not sure about performance in local conditions, you need to ask if you are willing to produce the crop knowing you are exposed to price risk. Factors to think about:

  • Cost of production vs. approximate local price you can expect. Try to get an approximate band of min and max local price, how much input and production costs will add, and your expected min and max yield.
  • How much might you lose if the crop fails (you lose all your input and production costs) or get the worse possible price?

For a crop that is not explicitly in local demand, there could be two possible situations to address. First, if there is demand, but buyers aren’t used to sourcing it in your region, they likely source it from an outside area and use it locally. That’s a promising start, because it means that there’s local demand, but the buyers is just not used to buying it locally. This could be a win-win for all.

Alternatively, it could be that there was just never any demand for the crop because there has never been a supply in the region. This is a classic “chicken or the egg” problem: If you grow it, it will stimulate local use and thus demand; but you likely won’t want to take the risk of producing that crop until you have a sense of demand for it.

How to handle the inevitable challenges (and opportunities)

Many buyers don’t want to commit to shifting to a new crop until they are confident there will be enough supply. This is especially true if the buyer requires a steady/secure amount of a specific crop for their operation.

When the local market is not established, you’ll ideally want to forward contract. This gives both the grower and the buyer the respective reassurance that it’s worth growing the crop, and it’s worth relying on a local supply of the crop. Keep in mind the need to solicit a forward contracting opportunity as you plan your crop year. This should be a core focus during January/February/March (the same time you would usually do your other forward contracting). When you forward contract, you are effectively taking on execution risk in exchange for the certainty of having a buyer, e.g., if you can’t deliver because you can’t successfully grow the crop, you need to help the buyer find an alternative source of supply or buy out the contract.

When you negotiate your forward contract, think about the following:

  • Negotiate an Act of God clause that leaves you off the hook in case the crop fails due to factors out of your control.
  • Manage your production risk using crop insurance if it’s available for the crop you are growing.
  • Only forward contract what you think you can reasonably produce — negotiate with the buyer an amount that you are confident you will be able to supply in a worse-case scenario (and remember to give yourself some margin of error on yield, etc.).
  • Consider asking your buyer to take any extra bushels that you might potentially produce at the same price. Ideally, they will have the attitude “I’ll buy anything you can produce” (if so, get this to be your contractual agreement). They might prefer a right of first refusal on any extra volume you produce, in which case, they should match any competing offers you might get in the spot market for any additional bushels you have.
  • Think about how to best work with the buyer. Remember that the buyer is committing to being dependent on your ability to supply — especially for anything that is a specialty crop or for which there is no local alternative supply in the event that you can’t deliver. These buyers will want to ensure you are successful, so if they have an agronomist or other resources to help you successfully produce the crop, be sure to leverage them.

While these are important points to consider when looking to grow a new crop, it is important to keep your farm (and livelihood) secure by having a back-up plan. You should always ask yourself if there’s an alternative source of demand/potential market for your crop. For instance, malt barley can easily be feed barley, rye can be sold as cover crop seed or feed grain, peas can be sold as feed, etc. It is never too late to grow your crop base or your business.

 

Alain Goubau is the co-founder and chief operating officer of FarmLead, an online grain marketplace.

Any views or opinions expressed in this article are those of the author and do not reflect those of AGDAILY. Comments on this article reflect the sole opinions of their writers.
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