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XVI - Risks & Challenges of Direct-Sales

Updated: Jan 16

It is always difficult to contemplate change, particularly when confronted with such a fundamental shift that may affect our livelihoods. You may not be content with the current situation, if not truly frustrated and fed up, but a paradigm-shift like the one we’re calling for may be scary. There are many unknowns to contemplate and assess down any new path, but we should resist the temptation to stick to the status quo.

This is only natural and rational, thus it is wise to dwell on “risks” rather than get carried away with the “rewards”. Accordingly, before our upcoming virtual-meetings we thought we would publish a short piece to address some of the concerns you may have about direct-sales. Also, rather than the many virtues of direct-sales, with prospects of higher margins, here we are going to focus on risks and challenges.

Before getting into these matters, we also ask you to reflect on our previous article, where we brought up our concerns about the future of bulk-trades. The global demand-and-supply situation may put our bulk-exports in jeopardy, threatening the channels we take comfort in and continue to rely on. Thus, there is a push-factor at play as well -- a necessity to consider alternatives for the survival of our grain-sector.

Shifting to direct-sales is all about risk-reward trade-offs, weighing the potentially higher rewards against the trade-risks involved. To this end, we keep emphasizing the importance of risk assessment and management. Properly vetted contracts with secure payments are always preferable to one-off sales, and so is risk-spreading over multiple contracts or crops with different parties – a more diversified portfolio.

You may also worry about grain-servicing and container-supply. The latter has been a perennial problem but we feel confident about our ability to pull containers inland that otherwise return empty to Asia, or to move your grains to the coast to load those containers. As to grain processing and handling services, there is more than what meets the eye, and as these trades flourish even more capacity will surface.

Then we turn to the greatest challenge we face: attracting buyers. Our region is known for its bulk-exports, not its farms that buyers can do business with. We can change this image, but only with your active participation in posting farm-profiles, which we can then incorporate into our trade-mall concept. The goal here is to provide visibility into our region by displaying our farm-capacity and crop-variety.

We hope that this brief discussion paper, together with the previous one on the risks our staple-exports face, is helpful in assessing risk-reward trade-offs between bulk and direct sales channels. We are looking forward to discussing these matters with you further in our upcoming virtual-meetings, and hope to receive more comments and suggestions from you to shape up the discussion-agenda for those meetings.

Managing Trade Risks

All along we have been upfront with the fact that though direct-sales may yield higher margins, they also bring more trade-risks to worry about than you may be accustomed to through bulk-channels. As narrow as bulk-trade margins may be, producers are familiar with the contractual arrangements and enjoy secure payment terms -- though some may doubt that when faced with contract-conflicts.

In stepping out of the familiar bulk terrain into direct-sales, producers ought to be much more careful in selecting credible buyers and considering all the trade-risks:

  • More market research into targeted end-markets before making crop choices suitable to own conditions, with options to fall back on conventional channels

  • Develop a strategy to strike a balance between bulk and direct sales, and limit exposure to any one channel or buyer -- risk-spreading across different channels

  • As much as possible, rely on contract-orders from credible buyers, with due diligence into their corporate background, reputation and financial strength

  • Make sure that the buyer needs your crops as much as you need its payments -- try to gain “critical” supplier status, not just one of many they procure from

  • Before entering contracts, solicit professional and legal advice regarding terms-and-conditions, delivery and payment terms, dispute resolution clauses, etc.

  • Assess own production capacity before taking on contractual obligations, including grade and quality promises, volume commitments, and delivery dates

  • Engage credible service providers (handling, processing and logistics) that can be relied upon, with contractual obligations to meet fulfillment/delivery conditions

  • Go through licensed export agents to ensure insurance-coverage, and also line-up reputable agents to clear customs and make deliveries at the import end

The above list may sound onerous but keep in mind that even regular contracts you enter with local grain-companies have their drawbacks. Also, bear in mind the risks bulk-exports face in global markets; the future may not be as secure as you may be led to believe. Most importantly, take small-steps in switching to new channels; diversify your crop-base and do not bet an entire year’s supply on direct-sales.

Grain handling capacity

Many of you may remember the growth pains on the grain processing and handling front as the pulse-wave was getting underway. Start up pains cannot be forgotten but local initiatives did emerge and a number of local grain companies turned their attention to these budding trades. The handling and containerization capacity may still not be where we would like, but a mature industry segment has fallen in place, and pulses now account for 10-15% of our grain exports, a significant achievement.

In the meantime we have seen containerization initiatives in other segments as well, still too limited in scale but nevertheless worth taking note of. The few start-ups we watched were successful in setting up cleaning, grading, bagging and loading facilities with all the necessary equipment in place. The problem, however, has been sustaining steady volumes to stay alive in this business, clearly due to a lack of trade-facilitation channels to give rise to a viable grain handling sector with staying power.

To use a cliché, this is a classic chicken-and-egg problem. Without steady volumes you cannot expect a viable service-sector to emerge, and without that in place, you cannot fulfill contract orders. But we thought long and hard about this challenge, and developed concept-plans to nurture new export-channels to form -- at our logistics partners’ facilities, or through third-party contract arrangements, and in all likelihood hybrid models across the region, depending on specific service needs.

One reality is clear, however, that you cannot build facilities and deploy equipment in advance waiting to be utilized. Trade-facilitation has to come first to gain better insights into the type of trades that are likely to emerge before investing in facilities and equipment. Requirements are going to be very different for container loads of wheat or barley than specialty-soybean or custom-mixes of coarse-grains or oilseeds.

We cannot make any contractual commitments to third-parties, or ask anybody to invest until we have more visibility into the types of grain-trades we are going to generate. But we do have contingency plans to handle different crops through existing channels. Also, our principal logistics-partner, Arrow, is keen to extend its reach into these service domains once needs and volumes gain greater clarity.

Container supply difficulties

We are encouraged to see that many producers are expressing interest in direct-sales channels. But the typical response we get is: where are we going to find the containers to fulfill these orders? We are all too familiar with this perennial supply problem across the Prairies. But if we continue to knock on railway doors for empty containers, we are going to get more of the same answer, as they are not your local container-store. In fact, they have no control over container-flows to help you.

We have been hearing these complaints for decades, since we were retained in 1990 by the provincial government to look into this pressing problem and find solutions. But our recommendations to work with shipping-lines, to develop balanced trade-flows and service-plans to pull more containers inland, have never been taken seriously. Instead, shippers and governments alike have been begging railways and port-authorities to find solutions to a problem they have little influence over.

The reality is that there are huge volumes of containers returning empty from our coast to serve the head-haul in Trans-Pacific trades, enough to give a significant boost to containerized grain-exports. But even beyond this, shipping-lines can direct more containers eastbound across the Pacific through our ports instead of others in the US, as long as westbound grain exports continue to grow to balance the flows.

The reason shipping-lines do not release containers inland, instead swallow the cost of returning them empty, is that timely port-returns are rare events. They will not take these risks when the priority lane for them is eastbound, where they have to re-position empty containers as steadily as they can. Pulling containers inland and returning them back to the coast will take more time, but if done reliably, shipping-lines will gladly put more containers on those routes to earn back-haul revenues.

We are already engaged with shipping-lines to find practical solutions. The problem is somewhat more complicated than just balancing imports from Asia and exports from the Prairies, as there is another piece to the puzzle, pulling containers inland loaded to make them available for outbound grain shipments. Otherwise, we also have to consider moving grain-exports to where the empty containers are, instead of loading them at source -- issues that boil down to cost, not lack of container-supply.

Real challenge: reaching buyers

Aside from managing trade-risks, developing the service-capacity, and re-positioning empty containers inland, the more pressing challenge is reaching out to buyers and presenting a compelling case for procuring the grains they need at source from producers. In this vein, we keep stressing the importance of recasting our global image from one of bulk-trades to an advanced farm economy, where a huge variety of crops can be sourced from farms and shipped direct to end-users in containers.

To this end, we presented a five-prong strategy to promote ourselves to prospective buyers -- advanced farms, research capacity, crop variety, institutional capacity, and logistics services. The article we posted on this topic attracted a lot of attention from producers. But ironically, we cannot seem to get public-agencies or producer-associations to take this initiative seriously, even though the perils bulk-trades face in global-markets are evident and we have to create alternative export-channels.

However, we are not going to let that distract us from our determination to carry on with our trade-mission. We laid out a plan to bring more visibility into the our farm-economy by showcasing farm-profiles, which we believe will attract the attention of grain-buyers from all around the world. Moreover, we developed a virtual-grain-mall concept, a web-platform to display our production-capacity and all the crop-varieties we have in the offering, for buyers to purchase directly from producers.

We now have a template on our website where you can see what a farm-profile will look like, and what is involved in developing one for you. We are also developing an image and database platform to transfer these templates to, where we will have the capacity to manage 1000+ farm-profiles (more if there are subscribers). But without your active engagement and participation we cannot see this project through -- we urge you to sign-up, and with a little bit of input from you, we’ll take care of the rest.

In order to sway you to direct-sales, we know we have to alleviate your concerns, be it trade-risks, service-capacity or container-supply. We are confident of our capacity to assist you on these fronts, but the more pressing challenge we face is reaching out to buyers, and for this we need your help with farm-profiles. The world knows us for bulk-trades, not as a region where they can buy quality grains directly from farms.

Risks and Challenges of Direct-Sales
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