Pricing Versus Marketing

[charliep]

I forget the thread but one of you made reference to price versus market. I thought I might get a discussion thread going on this topic.

Price is the end result/value a willing buyer and seller agree to to make a sale. The end result/price of a sale serves as guidance for the next buyer and seller when they enter into negotiations around another sale (provided the information is public). In the ag. markets, this process occurs literally thousands of times each day.

Marketing is the process of understanding your customers needs (a major part of which is quality and consistency of supply), developing a product that meets these needs better than any of your competitors and pricing this product based on the value it provides to the customer. The objective is to create a win situation for your customer and participate in their financial gains.

The discussion to date has centred around potentially restricting supply, some type of pricing cartel, free market versus regulated, etc. Are there some other ways we can achieve higher values out of the ag. products we produce?

Charlie P.

[ianben]

Hi charlie P
I am enjoying the discussion here even if we are not finding a solution.
If I could market as you describe above-pricing this product based on the value it provides to the customer. The objective is to create a win situation for your customer and participate in their financial gains.
This is what I long to do, but even with 25 million customers within 1hr of the farm, I cannot.

Volatile prices mean the best deal I can attchieve is a premium over market.
Fixing price leaves him vulnerable and futures cost him money. This may give me a slight advantage over my neighbour
but I do not participate in his gains,or supply him with the service he deserves.
Affordable regular supply.

I do not want to restrict supply just manage supply and demand.
We need help to market.
We cannot be forced.
What is good for one must be for all.

We have marketed, sold, whatever grain the same way for the last 50yrs.
In that time the way we produce it has been transformed. GPS can prouduce a map of yield.Incredible!!!!

There must be something we could do to improve the way we market.
If we could at least agree on this?
A poll perhaps???
Regards Ian

[ianben]

Hi charlie P
I am enjoying the discussion here even if we are not finding a solution.
If I could market as you describe above-pricing this product based on the value it provides to the customer. The objective is to create a win situation for your customer and participate in their financial gains.
This is what I long to do, but even with 25 million customers within 1hr of the farm, I cannot.

Volatile prices mean the best deal I can attchieve is a premium over market.
Fixing price leaves him vulnerable and futures cost him money. This may give me a slight advantage over my neighbour
but I do not participate in his gains,or supply him with the service he deserves.
Affordable regular supply.

I do not want to restrict supply just manage supply and demand.
We need help to market.
We cannot be forced.
What is good for one must be for all.

We have marketed, sold, whatever grain the same way for the last 50yrs.
In that time the way we produce it has been transformed. GPS can prouduce a map of yield.Incredible!!!!

There must be something we could do to improve the way we market.
If we could at least agree on this?
A poll perhaps???
Regards Ian

[ValueChainFX]

Well, the area we are discussing is not a new one for sure. There are several ways that have been discussed and looked at to no end as yet in our Canadian (and I am sure global) market!
I have found that most of the folks that would like to maket outside the "NORMAL" marketing flow, have a product that they feel has some value added to it! Firstly, if you have such a product and dump it into the "NORMAL" marketing flow, it becomes the same as all the other product of its' kind. (No more Value Added or distinction) Secondly, the price you get is only one part of your bottom line, remember that if you can save money on product, increase production (or yields) and deliver a consistant product to the customer, and lock the customer in with that, then you achieve your goal. Thirdly, if you believe that you can do this by yourself, I would be totally surprized, the supply chain and Value Chain run both vertically and horizontaly, value added not only refers to the product, but the method and traceability of the products life thread and the type of feed back you get to maintain high quality or better the product.

I believe those involved in any market will agree that feedback is what makes them better producers. Customers do want products that they can trace back to the origins and this type of product is becoming more and more in demand. In the future you will see a customer that is willing to pay the price to ensure the product, if you prepare now to meet that customer request I am sure you will be surprized with some of the other results you achieve.

[chaffmeister]

I've only recently joined in but it seems to me that the common thread of these discussions relates to finding marketing solutions which, I think means fixing the problem of low prices.

Let's look at the options:

1. Restricting Supply

Farming is a funny business - regardless of where the price is, there is an incentive to produce more (get more volume out of a fixed land base). When prices are low, you need to produce more just to pay the bills. When prices are higher, you want to produce more to take advantage of the higher prices.

In contrast, when processors (crushers or millers) see low (or negative) returns they slow down or shut down until margins improve. However, they don't do it easily - they know that if they drop out of production for a while, their competitors will simply step in. They can do it because there are fewer of them and most of them individually can have a ssubstantial impact on the market.

The problem with farmers trying to do the same thing:
a) Farming has an annual business cycle - one shot at it per year. A large processor can slow down production or shut down some of their plants and three weeks later, when things improve, they can ramp up production again. Totally impossible for farming.
b) An individual farmer (or small group of farmers) trying to restrict supply will have no impact at all. A large proportion of the global farm population is needed. The problem then becomes one of ensuring everyone sticks to the program.
c) There is enough productive capacity in the world that if North American farmers were successful in growing less to support prices, other countries would "take up the slack" and produce more.
d) In other threads I have read about the idea of withholding grain production off the market. Unfortunately, the market knows the grain is there and, whether its marketed or not, it will bear down on prices. (Remember the days of US government owned stocks - the US govt bought the grain and stored it (and stored it, and stored it). The idea was to support prices and reduce price volatility by holding grain off the market only to sell it when prices rallied to pre-determined levels. The market had no incentive to pay more than the level where govt-owned stocks would be released and farmers kept producing to sell into the govt program.
Very expensive and not effective.

This may seem overly simplistic but this is the basis of why a "sabbatical" or "production holiday" will not work at the farm level.

2. Pricing Cartel.

Sounds good in principle, but the risk of a member of the cartel over-supplying or under-pricing is quite high (just look at OPEC).

3. Free market vs regulated (central desk).

The question here is, does a regulated market (CWB) provide a better return for farmers? I can see that the philosophies are so entrenched that there is nothing that anyone can say that will change people's minds on this one. However, the questions that need answers are:

a) Can the CWB sell more grain than farmers can on their own? We know that the answer is no. In fact, if you want to sell all your grain off your farm at prices that you like, you may not be able to.

b) Can the CWB get a better price than farmers can on their own?

It has been said that, at a minimum, the CWB can get the average price plus a premium almost all the time. I agree that this is the minimum that should be expected. However, farmers can get the average price as well - simply divide your annual production by 52 and sell an equal amount each week on the open market. So the question comes down to the premium.

In another thread we talked about the cost of marketing grain through the CWB. In that thread I estimated that the CWB system in 1998/99 had cost about $24 per tonne (not including freight) as compared to my estimate of $15 for canola (non-CWB). Based on these numbers (and assuming that canola is a good non-CWB example), the CWB needs to capture a minimum of $9 per tonne over the average price over the year. From my point of view this is a very tall order for a couple of reasons:
a) The CWB will tell you (as they've told me) that they cannot get a premium on all markets - only some. They will admit that in most markets they are
"price takers" - in other words, they compete on price. No premiums here. And this includes their biggest
"customer" - the Canadian domestic market. (Japan may be the only
"premium" market the CWB has left.) So to capture on all CWB sales an average of $9 per tonne above the average annual price, in the markets where they get premiums they would have to get much more than $9.
b) Not including the premiums, the CWB would need to make sales that would be equal to the average annual price. Nobody but the CWB can tell you if they doing this or not, and the CWB is not talking. What is interesting is that, time and time again, there is information that comes out that would indicate the CWB is selling below
"market prices".

So there's the holy grail for those that want to figure out if farmers are benefitting from the CWB: find out if the CWB is getting better than average prices over a crop year.

Let's forget all the rhetoric about the CWB. The CWB has become much more that a marketing agency. Supporters point to the benefits of the CWB: all the market development and marketing that the CWB does; interest free loans (cash advances); government backed exports, etc. As well as premium prices.

Well, they may be getting premiums and they may not be - we may never know it either. I know many people that work at the CWB and they are good people - smart, rational, dedicated and hard working. But they are people and that means they are not infallible. They make mistakes. But the real problem is that the mistakes can be hidden. (When a private grain company makes a mistake in the market and they lose money because of it, there is no way to pass that loss back onto farmers. But you pay for the CWB's mistakes.)

As far as all the other stuff goes, marketing and market development, cash advances, government backed exports, all of it can be achieved without the CWB. In other words, you don't need the CWB to achive these things.

Market development: non-CWB grain groups have been very successful (Canola Council of Canada; Pulse Canada).

Cash advances: comes under separate legislation from the CWB anyway - the CWB just administers it.

Government backed exports: Export Development Corp (EDC) does the same thing.

So, back to charliep's question about marketing solutions: I don't think anyone can say with certainty whether the CWB has been a good thing for western Canadian farmers. There are just too many unknowns. I can understand why some want to believe - strength in numbers, all farmers acting as one through the CWB, not competing with each other, etc. But the benefit has never been PROVEN to me. And until it is, I shall remain skeptical.

4. One more possible solution to marketing problems:
I've said it before in other threads and am totally committed to the concept - trying to control the supply is not going to work. Try to control the value. Those that are already getting involved in niche markets where they are working together with end-users (HEAR canola; Warburtons wheat) have taken the first step. But its discouraging to see the guys at Prairie Pasta get frustrated by regulations while their counterparts at Dakota Growers become the third largest pasta manufacturers in North America.

That's the key to the marketing issue - get as close to the customer as possible.

I'll stop now.
cm

[chaffmeister]

I just stumbled on this stuff from the Ag Canada web-site. Speaks to the perceived need to have the CWB so it can develop markets and because it gets govt financing:

CANADIAN INTERNATIONAL DEVELOPMENT AGENCY
The Canadian International Development Agency (CIDA) is the lead player in delivering Canada's official development assistance program. CIDA directly benefits the Canadian cereal grains sector by purchasing cereal grains for Canada's Food Aid program and indirectly by creating markets for Canadian cereal grains.

EXPORT DEVELOPMENT CORPORATION
The Export Development Corporation (EDC) is Canada's official export credit agency. The EDC helps Canadian exporters compete in world markets by providing a wide range of financial and risk management services, including export credit insurance and financing to foreign buyers of Canadian goods and services on a case-by-case basis. This Crown corporation operates on a cost recovery basis and helps Canadian exporters match the export credit programs offered by foreign competitors.

[TOM4CWB]

I think the Japanese market is a poor example of the CWB "extracting" a premium by single desk marketing.

Why?

With the balance of trade with North America going to benefit Japan, and with Japan living on exports, they must give a little back, or we won't do business.

Grain exporting countries know Japan can afford to pay fair market price, so no one targets export subsidies towards them.

Besides the US is the biggest supplyer of wheat to Japan, and everyone tells me how bad their wheat is, so what gives?

The US is Japan's biggest export market, so the "feel an obligation" to buy wheat from the US.

I am sure the same goes for Canada! Plus everytime the CWB talks about Japan they indirectly insult them by saying Canada extorts a blackmail fee from them everytime we make a sale to Japan.

We say we won't sell to you unless you pay us more than what it is really worth, how absurd!

Now how much does this really have to do with Marketing, besides the Millions spent by the CWB on western farmers, maketing themselves to us?

[chaffmeister]

You may be right about Japan TOM4CWB - which makes the image of the CWB as an "extractor of premiums" even harder to see.
cm

[charliep]

I would go cautious on your comments about Japanese pricing. I know I will spark controversy but I suspect this is an example of marketing/relationship building that works. The price Japan pays for the product reflects the value we give them - that is prefered access to high quality/protein Canadian hard red spring wheat on a consistent basis to meet a just in time shipping program (expensive land in Japan so they don't have a lot of storage capacity at their mills). This relationship has taken years to build and is built on trust/service.

The other to highlight is the fact that Japanese economy is struggling (look at the current value of the yen and compare current CWRS wheat prices in their local currency versus previous years). This business is done a commercial basis at prices that reflect the market. Our privileged position is based on a favored relationship that we need to have respect for in our discussions.

[chaffmeister]

charliep:
For discussion purposes, please tell me what "prefered access" means. (If we are in short supply of high quality wheat, would Japan get "right of first refusal"? What about when we are swimming in high quality wheat? Does preferred access mean anything?)

As you say, this business is done a commercial basis at prices that reflect the market. (What about the premium? If there is a premium, how much?)

Canadian growing conditions and the abilities of our farmers are responsible for the high quality.

Although a point of much debate, shipping on a consistent basis is the result of the whole system working together. Although it appears that the CWB would like to take full control and credit, the CWB does depend on the grain companies and railroads to achieve this.

Could we have this same relationship with Japan without the CWB? Don't we have a similar relationship with Japan on canola?

The US ships twice as much wheat to Japan than Canada. What can we do to ship more wheat to Japan and take some of this business away from the Americans. (We sell on quality, they sell on price. It seems that Japan buys on quality - this and our good relationship should translate into more business, shouldn't it?)

These questions are not meant to express any disrespect regarding Canada's relationship with Japan. My intent is to benefit from the discussion.

cm

[charliep]

Thanks for your request for clarification/last comment. From my private/grain days, I am very sensistive about customer issues.

Re: Preferred access. A bad choice of words. An example might be a better explanation. Two neighbors - one with hogs and the other with barley have developed a long term supply relationship. The barley grower is committed to providing access/first right of refusal to deliver heavy barley (if possible) even in years of tight supplies. The hog barn is commited to taking barley from this neighbor first even in years of large supplies. Supply agreements are made to ensure barley is requested/delivered when needed during the year. Pricing is done using western barley futures and an agreed to basis. The basis can be reviewed regularly to reflect market conditions. Each party is free to hedge using futures if it is felt it is a good business decision/risk management tool without impacting the other party. This is the kind of relationship I am talking about.

I hate the word premiums. I would like to think of value instead - that is having a customer pay a price above the market because we are able to deliver a consistent high quality product that exactly fits the custmers needs over a period of time when needed. The higher price we are able to achieve above Portland DNS is not a premium but rather a reflection of the value we provide the Japanese Food Agency in supplying their mills with a consistent quality product during the whole year.

Does this happen now? Yes - the JFA buys 110,000 /- t every month of 1CWRS 13 % protein CWRS wheat from Canada and has done so for a long time. Could this business be done outside the current pooling system? Yes but even the grain companies would have to develope a contracting program to make sure we are able to fill the ships as they arrive every week.

Can we increase sales to Japan at expense of the US? I can only answer with questions. First a comment - Japan is a very mature/stable market that buys a very consistent volume of grain every year - our growth in sales has to be at the expense of other exporters. Are US and Canadian wheat co-mingled or is it kept separate and delivered to mills based on quality characturistics? I suspect US wheat has a different market so we may end up selling a different grade/type of wheat to increase market share. Would the Japanese food agency source all their supplies from one country or do they make the decision to source from both regions as a method to reduce supply risk, risk of paying too much (increase competition) and for political reasons (spread sales around a bit)?

I look for others thoughts.

[chas]

Two concepts of marketing, deregulated(open) the wealthy survive, regulated (controlled)market everyone benefits.
Deregulated causes more competition and is to create lower prices for consumers. Thats why corporations merge to gain market and control of prices. Farmers are in a deregulated market, so if we want sustainablity we must merge into marketing agencies to have some price control.
Some are questioning the CWB on alot of things that have no answer but yet they will sell all their grain to some profit making grain company without a question. They could have done better if they were running the ship. Isn't it odd that we trust things that we know nothing about over things that we know something about and could possibly excersize some control over.
Lets hire our own marketers. I can't trust a system that is working for their own interest and not concerned about my profitablity. Tom4cwb I think it was you who said that you love to trust those people who put their own interest ahead of yours. Chas

[freebird]

Re: the open market vs. regulated one.
The open market maximizes the price to
producers while minimizing the price to
consumers. That is the result of
competetition.

This paranoia against grain companies is
what, I guess, causes some to have a
love-in with a state sponsored entity
that will throw you in jail if you would
dare try to sell grain that you grew by
your own effort to someone besides them.

Regarding the CWB, any issue besides the
fact that they operate with coersion is
entirely irrelevent. I don't care if
they do get a premium for wheat, I
should still have the right to sell my
grain to whom I choose. And I don't
care if 99% of other farmers vote to
surrender their minds to the CWB - they
don't have the right to surrender mine.

Adolph Hitler was head of a
democratically elected government - the
majority is often wrong, that's why
there has to be constitutional limits on
government.

A farmer who grows grain has the right
to sell it to whom ever he wants, by
grace of the fact that without his skill
and effort, it would not even have
existed in the first place.

[TOM4CWB]

Freebird,

You really seem to have a bur under your shorts!

But I am afraid that I must agree with you!

The best example of how a free and democratic society must work is respect for each other, and with that goes respect for each other's property.

A little story to show how democracy should and should not work in our society.

Agri-ville members think TOM4CWB should buy all other members of Agriville new computers so you can access Agri-ville easier. So now what does TOM4CWB do when 4000 members vote in a democratic referendum to make TOM4CWB pay Agri-ville $12 million for new computers?

Would it be fair to take all TOM4CWB's money for the rest of his life, and the rest of his childern's lives to pay this debt that was created by a binding democratic referendum?

I certainly don't think so!!!!!

So this is the problem with democracy, it must be based on mutual respect and voluntary contributions for it not to be a dictatorship!

My point on Japan is only that an entity that worked on a voluntary basis like Excan, or AgPro, or UGG could all easily be providers of high quality wheat to the Japaneese market, and even private companies Like Cargill, Louis Dreyfus, or Conagra could provide the same services.

I think time will prove me right that trade balances and trade alliances and preferences are important to doing business, not just the quality of a product!

Am I right?

[charliep]

I'll let others deal with the top part of your message Tom. With regards, there is nothing stopping Japanese trade under a open market system (similar to canola). There likely are long relationhips/political implications, but at the end of the day, whoever sells Japan wheat must be able to land a 25,000 cargo of 1 CWRS 13 to 13.5 % protein every week for a whole year.