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Be The Leader In Your Trade Area
by Sherry Lorton

Want to gain market share? For grain and feed managers, gaining market share is in many ways about controlling acres. Grain businesses make money trading bushels and the more bushels they can control – and effectively merchandise – the greater the opportunity for improved profitability. Notice that the key here is control. It’s not just handling grain, but being able to influence the movement of bushels in and around your trade area that creates the opportunity.

Controlling acres isn’t about greed, getting control of bushels at any cost. Controlling acres is about making and securing the elevator’s place in the trade area by providing valued services to the local market. This is done in two ways. First, you must be a viable year-round market for those who sell grain (producers). Second, you must be a dependable and consistent market for those who buy grain.

As our industry grows, we need elevators to facilitate the flow of bushels between producers and users. Elevators that are not active participants in the market and don’t have the knowledge, skills or resources to control the acres will eventually fade away, but someone else will be there to take their place. The market will demand it. With this in mind, let’s look at how an elevator becomes a leader in the local market.

5 Steps of Control Based Merchandising

Controlling acres is about having a strong presence in the marketplace, a presence viewed as a viable, year-round market – someone both buyers and sellers instinctively turn to. Building this reputation, however, takes work and is in many ways dependent on the way you control other facets of your business.

There are five key components to control based merchandising: margins, bushels, space, finances and exposure. Lose control of any one of these and it puts the others at risk. For example, if you lose control of your financing, it hinders your ability to buy bushels, which in turn affects your margins and your reputation with the producers. Lose control of your space and you lose control of your margins, and your flexibility to sell and ship grain as needed, which in turn affects your dealings with buyers. All of these elements are interconnected and attention to each one is necessary in the ultimate quest for controlling acres. Let’s take a closer look at each one:

Control #1: Margins

The ability to control merchandising margins is determined in large part by the skills of basis trading. The more adept you are in trading basis and managing spreads, the more control you have over how grain moves and the margins that are made as a result.

Effective merchandising is about trading the basis. Basis values are changing all the time and as they do the market presents opportunities to buy or sell good basis. Your job is to identify the opportunity and take the appropriate action that will enable you to benefit from basis movement. A high sell basis is an opportunity to be an active seller. A low buy basis is an opportunity to be an active buyer. Accomplishing the two generates profitable margins.

To this end, you are not focused on a single position but are looking for opportunities to buy and sell good basis values all the time on all bushels. By disconnecting yourself from a specific position and thinking instead in terms of trading basis you broaden your scope of merchandising. You are able to trade the entire market and not just bushels that move through your facility. This is the first step in controlling acres.

Control #2: Bushels

How you originate bushels off the farm is another key component of controlling acres. Ideally, you want to become a valued part of the producer’s marketing practices and be viewed as the market for all of the producer’s grain, whether it comes into the elevator or moves direct from the farmer’s bin to someplace else. Build this reputation is by creating quality relationships with your producers based on services that bring real value to their business.

An effective and long-lasting marketing program is not one based on a lot of complicated or speculative contracts. What works in the long term is helping your customers sell at a profit using a few simple, sound marketing tools – and doing this year after year in a way that results in improved and consistently profitable outcomes. A sincere commitment to helping customers improve their outcomes will ultimately lead you to having more control of the acres in your trade area.

Control #3: Space

For a long time the value of elevator space was measured in terms of what could be earned from storing grain; but as production has increased and demand from ethanol plants, feeders and other users has grown, space has become more valuable in terms of how it can fulfill the needs of the market. The real value of space today comes from being able to hold grain when the market has excess supplies and being able to sell grain when the market needs it. As a result, you capture margins from merchandising the space – margins that are much better than those earned by simply storing grain.

The key to getting the value from space through merchandising is having control of it. Storage, grain bank and other delayed-decision contracts tie up your space and give control of how and when grain moves to someone else. To effectively control acres, you must operate your business in a way that keeps you in control of your space. This means avoiding the traps that prevent you from capturing the value of your space, such as cheap storage, grain bank or free DP. Offering services like a profit-based marketing program provides your customers with more positive outcomes while keeping you in control of the bushels.

Control #4: Finances

The issue of financing is one that affects all aspects of your business. Financing issues can range from the everyday management of cash flow to structuring a proper credit line, funding margin calls and building working capital. Achieving financial control of your business comes by identifying your limitations and then working to strengthen your position over time. This is accomplished in a number of ways.

First is a focus on building working capital by increasing profits through improved merchandising margins. Second is developing a strong banking relationship -- having a suitable credit line and a banker that understands your business.

Third is having the skills to create a balance to your merchandising. Even if you have deep pockets, it’s not always prudent to have a lot of money tied up in a basis position. A financially savvy basis trader works to maximize merchandising margins using the least amount of money. Often, this means finding ways to capture basis movement beyond the traditional “buy and hold” method.

Building the company’s financial strength is essential to the long term goals of controlling acres. Without proper fiscal management an elevator cannot build and sustain a position of leadership in the market.

Control #5: Exposure

The final element necessary to controlling acres involves exposure -- those things that put your operating capital at risk. Exposure can be as simple as being out of position on your DPR or as complex as managing forward contracting levels – are you contracting more bushels than you can afford?

Exposure can also come in offering complicated contracts that your customers or you really don’t understand – which leaves you susceptible to lawsuits. Exposure is having no plan for managing those unlikely and unexpected events that rarely occur but create havoc when they do. Could you lead your organization through the crisis created by $7 or even $5 corn?

All these exposure issues affect your ability to serve your customers. To make yourself a viable part of the market and effectively control acres it is imperative that you first control your exposure to risk. You must understand the risks you are up against and take actions along the way to keep your exposure to manageable levels in all circumstances.

All in all, controlling acres comes by building a strong and healthy business. When you are in control of your margins, bushels, space, finances and exposure, it puts you in the position to properly service the local market and makes your business a valued, respected and essential part of the trade area. You control the acres to everyone’s benefit.

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