As part of our portal’s mission, we state that through the direct-sales channels we facilitate producers will get higher prices while end-users will lower their costs. How is this possible – are we trying to fool everybody to entice sellers and buyers alike to the trades we are facilitating? Absolutely not! There are real and significant cost-savings and quality-benefits behind our approach to grain-trades for both sellers and buyers to gain from – win-win outcomes.
We made these arguments in favor of direct-sales and container-shipments in many of our previous articles and posts, but we wanted to take another crack at it directly from producer and end-user perspectives, with reference to how we think market-dynamics will play out.
Producer benefits: Producers are content with the prices they get from North American sales. They benefited from trade-liberalization over the years by selling direct to end-users, whereby eliminating trade-intermediaries to reduce consolidation-distribution costs. Through these channels, producers also get fair premiums for higher classes or grades of crops they grow.
However, they are still left with a surplus, on average half their output, that has to be sold to overseas markets. In this regard they are mostly captive to bulk-channels that yield very narrow margins, if any – dual effect of low export values and lack of adequate competition that allow grain-companies to protect their own margins and instead squeeze producers’ margins.
Thus, producers are highly motivated to find other buyers, but other than bulk-traders there is nobody else to sell to. They are looking for direct-sales channels like across North America that yield higher margins as long as they can avoid trade and logistics risks beyond their farm-gates – they would consider any price premium over what they get from local grain-companies a bonus.
End-user benefits: The price-premiums in procuring directly from producers may be coming out of buyers’ pocket but buyers stand to save much more by avoiding consolidation-distribution costs and trade-margins. Even after incurring the servicing-and-shipping costs, landed-prices at their own facility-gates will be lower than what they currently pay to local grain-suppliers.
Moreover, containerized-deliveries from production sources will allow them to schedule their volume intake of any particular crop according to their processing requirements, reducing their storage and inventory costs. They can still keep minimum reserve stocks to avoid production disruptions but in most cases they will be able to plan their crop-intake on weekly schedules.
Even more importantly, the most significant benefit of direct-sales to end-users is being able to procure precisely what they need, by crop grade/class, to achieve exacting end-use attributes of what they produce – huge advantage from a region like the Prairies that have the most refined classification-grading systems in the world, with the most reliable quality-assurance regulations.
Competitive dynamics: Since direct exports are not common-practice, those buyers that come forward early in the process will get favorable prices, as all they have to do is offer modest premiums over what producers currently get by selling their surplus into bulk-systems, which tend to be quite low, especially for the premium crops they sell into these channels for export.
As our platform attracts more overseas buyers, which is our explicit goal, there will be more competition for Prairie grains, benefitting producers. Farm-gate prices will no longer be benchmarked to what producers currently sell for to nearby consolidation-terminals but determined by a larger pool of end-users from global markets, competing with each other.
In time, however, buyers will also be able to adjust their procurement practices to reduce their costs. There is scope to further reduce shipping and logistics costs through larger and steady contract-volume commitments. Buyers can also enter long-term contracts, to entice producers to commit larger volumes at more favorable prices but hedged against market price-trends.
In essence, our core mission is to free up Prairie producers from their captivity to bulk-channels, whereby they can export directly to overseas markets like they do to domestic markets and across the border to the US. As a result, producers will get higher prices than they do from nearby elevators, and as warranted with quality premiums, while end-users get quality crops they need delivered to their facilities at lower cost than what they would pay local suppliers.
Market competition will dictate farm-gate prices like across North America, giving producers incentive to align their output-mix in response to price signals they get from global markets. This is precisely what our advanced but high-cost grain-economy needs, price incentives to shift to higher-value crops, while end-users get to buy these high-quality crops directly from our production sources, crops that they cannot get through bulk-channels or other grain-regions.