Managing Risk with Specialty Grains Number 4 in a series of marketing columns from Purdue University specialists. by Kathleen Erickson, Joan Fulton and Frank Dooley Balance. It’s imperative to success- Chicago Board of Trade (or other com- involves the additional costs. We have ful management, leadership and just modity exchange) is an effective way to all thought about the additional han- regular old life! But when it comes to reduce price risk when handling com- dling costs associated with specialty managing risk from specialty grains, modity grain it is also a useful tool when grains, but what about the lost income grain handlers find themselves in a handling specialty grains. that elevator mangers are used to get- unique position — a balancing act deal- However, the unique traits associated ting from blending? ing with several sources of risk. with specialty grains result in additional With commodity grains, elevator Risk is uncertainty about an outcome. risks. Quality and quantity are other managers can blend grains of different It is no news to any of us that while spe- sources of risk. Quality concerns are grades to meet quality minimums. cialty grains have generated some busi- twofold: being able to deliver grain However, sometimes specialty grains ness opportunities, they have also gener- tested for specific types of require- are handled in volumes small enough to ated some new business risks and a ments, such as genetic origin, and hav- prevent effective blending, and the ele- whole new set of challenges. In this col- ing grain with enough levels of the vator loses that source of income. In umn we will explore the different sources desired characteristics, such as oil con- other cases, the elevator may not be of risk and provide some insight on tent. For example, an elevator may have able to meet quality requirements to fill managing these new challenges. high oil corn, but not the particular an order because there is not enough For the purpose of this month’s col- hybrid the customer requires; or the volume of grain for effecting blending. umn, let’s focus on risk using grain While errors in operations and invento- handlers as the example. Grain handlers ry management are always expensive it daily face risks in financial, legal and is even more so with specialty grains marketing issues. Firms wishing to and the impact on firm profitability is reduce their marketing risk need to often larger. focus on these areas: Marketplace Uncertainties associated with demand Awareness, Relationships with Grain present another set of challenges, with Producers, Relationships with Grain new risks, for managers. Not knowing processors or Customers. customer needs can create uncertainty Of course, while these efforts will about the premiums in terms of what the help manage risk, they won’t complete- customer will pay for the additional ly eliminate it. When operating within value of specialty grain, the variability in a more responsive supply chain, opera- elevator may not be able to meet the the premium levels, and whether or not tional flexibility is a must. minimum oil content the customer the premium covers IP costs or creates needs because the in-bound high oil the desired profit margin. Risk’s Key Issues corn is below the minimum. Regardless of the size of your com- Finally, the elevator manager must Tools at Hand pany, how you manage risk (how you have enough quantity of the grain to Contracts are excellent tools for balance) can set you apart. For firms meet the customer’s needs. The risk of managing risk and can clearly outline handling specialty grains, risk is related not having enough of a grain comes potential scenarios, outcomes and to: Market price, Quantity, Quality and from three sources: not contracting for expectations for both the grain elevator Shipping timing issues. enough production, lack of incentives manger and the producer or the grain First of all, let’s consider marketplace in the contract and poor yields. The elevator manager and the grain proces- changes and the price risk that results. main result is not having enough of a sor. Contracts provide tools for commu- Price risk associated with fluctuating particular grain to meet demand. nicating what quantities are needed, market prices is a major source of risk, Timing, another source of risk, relates what qualities are required, premium just as with #2 yellow corn. Just because to managing the logistics of handling structures, production procedures and you are handling specialty grains you grain. Elevator managers need to have protocols and delivery time and place. are not immune from market fluctua- the right quantity of the right quality of Grain quality protocols provide addi- tions. After all, the specialty grains are grain for the customer at the right time. tional communication tools that support often priced as a premium over the com- Another management challenge supply risk management. As a process modity price. Just as hedging on the associated with specialty grains for producers, (continued on page 30) MARCH/APRIL 2004 29 (continued from Managing Risk on ty and price. In addition, they often competition and substitutes, and page 29) must manage additional logistics in remaining flexible in working with protocols support decision and action handling and delivering the grain. both producers and customers. regarding genetic selection, equipment Seed firms and grain handlers can Key to successful risk management and input management, in-field produc- help manage the risks of specialty is flexibility. Understand that even the tion management, post-harvest han- grains successfully by hedging with best job of price risk management will dling and testing and monitoring of on- not eliminate risk. But, those that exer- farm and off-farm inventory throughout Reducing Risk cise operational flexibility to deal with the entire process. for Handlers the unexpected have a leg up on the Managing demand risks successfully • Hedge using commodity competition. require careful attention to the cus- markets to reduce price tomer relationship. That requires learn- risk from market fluctuations Kathleen Erickson is President of ing customer needs, concerns and • Relationships with customers Erickson Communications, Clarks Hill, issues with yield, quality and price. It • Awareness of the marketplace Indiana; Dr. Joan Fulton is Associate further requires careful targeting of • Flexibility in internal operations Professor in Agricultural Economics, customer market segments to success- • Relationships with producers Purdue University; Dr. Frank Dooley is fully address the issues at hand. • Contracts as a tool Professor of Agricultural Economics at • Develop grain quality Purdue University. This column is Balancing Price Risk management protocols based on a distance education program Management • Price risk management on Marketing Value-Added Grains Remember, in specialty grain pro- services for producers offered by Purdue University through duction and handling, the players in the • Logistics management for the Cooperative Extension Service and market are concerned about both profit producers Agricultural and Biological and risk. Everyone faces additional Engineering, Agricultural Economics, costs in terms of inputs such as seed, commodity markets when appropriate, Agronomy, Animal Science, Botany & fertilizer, crop protection, equipment focusing on relationships with the pro- Plant Pathology and Entomology. For and often labor, as well. They manage ducer, assessing market demand (which more information, contact Dr. Joan increased risks in terms of yield, quali- includes anticipating threats from the Fulton at [email protected]. (continued from Founders on page 25) the Royal Society, two from the Royal Perhaps the most idyllic honor was absolute dependence on animal Agricultural Society, one each from given to Lawes by universities of aca- manure to feed and nourish crops. the Chemical and Linnaean Societies demic fame. While Lawes was by In 1843, a year after he patented and the acting owner/manager of nature not a successful university stu- superphosphate, Lawes appointed Rothamsted estate. dent in the classroom, he later received chemist Joseph Henry Gilbert as his The station has set the standard for honorary degrees from Cambridge, scientific collaborator, and the other centers and is currently linked Oxford and Edinburgh universities — Rothamsted Experiment Station was with more than 40 research centers high distinctions for a man who never born as a hotbed of agricultural and sci- across the globe. Lawes and Gilbert completed his studies. entific activity. The two men realized carried out nine long-term experiments that providing the increasing popula- at the station, dubbed the Rothamsted tions with sufficient food supply would Classical Experiments. In addition to Advertisers’ Index Agriliance. 5 require an efficient agricultural indus- work at the Experimental Station, www.agriliance.com try and that this increased efficiency Rothamsted scientists discovered and American Seed Trade Assn. IFC could be achieved through agricultural developed pyrethroid insecticides (syn- www.amseed.org trials. Gilbert and Lawes worked beside thetic compounds that are related to BioDiagnostics Inc. 27 one another for 57 years, laying the oily liquid esters with insecticidal prop- Ph: 715-426-0246 • www.biodiagnostics.net foundations of scientific agriculture erties). They also pioneered in the Indiana Crop Improvement Assn. 9 and crop nutrition through a series of areas of