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As more products with valuable output traits come out of the crop technology pipeline, so, too, should come new opportunities for ag retailers and growers. There's buzz that many of these new products will be contract produced. What will it take to win these crop contracts, and how can both ag retailers and their grower-customers benefit from them?
Millions of bushels
The Aurora Cooperative of Aurora, NE, first explored the idea of negotiating production contracts in 1992. “Our board of directors felt the cooperative needed to take a more active role in bringing options to our members,” says Todd Gerdes, head of the Aurora Cooperative contract production division since 1992. “They felt these options should offer a better opportunity for our members to add to their bottom line without major changes in their practices and equipment. We also felt, by doing so, we could enhance our input sales to those same members.”
In the spring of 1993, the cooperative initiated a contract with a buyer and offered growers two contracts: waxy corn and high-oil-corn production. Since then, Aurora Cooperative has offered a number of different contracts involving different grains.
Founded in 1908, the cooperative today serves an area about 75 miles east to west by 125 miles north to south. It has 35 retail locations, 17 of which have grain-handling facilities. Most of the company's sales are generated in agronomy, grain, feed and petroleum. “Our most recent fiscal year showed sales in excess of $290 million,” Gerdes says.
The central Nebraska cooperative's contract business certainly has grown. In 1993, it handled a couple of hundred thousand bushels. Today, its contracts exceed six million bushels, Gerdes says.
In the beginning, Aurora Cooperative approached the end user to establish a relationship. Since then, several processors have approached the cooperative. “Many of these contacts are due to familiarity with our other programs and our name in the marketplace,” Gerdes says.
What the buyer wants
“When visiting a processor and trying to initiate a contract, establishing a relationship is extremely important,” Gerdes says, adding that the processor must have complete confidence in the retailer's (and the growers') ability to perform. “They are taking quite a risk if you fail to deliver on your end of the deal. They need to feel confident in your history with your growers and the quality and quantity of the product you plan to deliver. If your producers encounter a problem with production, they want to know that you'll be able to make delivery of the product.”
Processors often will be interested in a retailer's ability to project crop size and quality, Gerdes says. “This can be greatly enhanced by having the producer subscribe to [your] scouting service,” he says. “You can generate weekly reports that are supported by qualified people.”
The processor also may want the retailer to provide traceability services. “This could include management practices used on the crop, chemical application records, fertility, irrigation, storage records and so on. Much of this information is already being collected by our agronomy personnel,” Gerdes says.
Aurora Cooperative's agronomy department offers fertilizer, chemical, seed and custom application services. In addition, the company offers producer financing, crop insurance and marketing services. Although a few contracts have required the use of the cooperative's inputs, or a portion of them, most do not have such a requirement, Gerdes says. However, since it has been offering contract opportunities, the cooperative has seen a higher percentage of input purchases. “When the contract is offered and producers accept certain production requirements, they seem to feel more comfortable when we're involved with their inputs,” he says.
In addition to its agronomy business, Aurora Cooperative handles more than 60 million bushels of grain per year. The majority of the grain is corn; however it also handles soybeans, sorghum, wheat and identity-preserved grains.
Recently the cooperative secured a soybean contract with Ag Processing (AGP). For this contract, a grower signs up acres (not bushels; the grower is obligated only for the bushels produced on those acres) to produce approved soybean varieties, including Garst brand seed.
The production from these acres is committed for delivery to the Aurora Cooperative, which commits delivery to AGP. In return, the producer is guaranteed a premium of $0.05/bu. “If the beans test above the minimum level for oil and protein, they could receive additional premiums up to $0.15 to $0.20,” Gerdes says. “Many of the approved varieties are already popular with growers due to their performance and yield.”
Only approved varieties are accepted. “This enhances our ability to sell the producer seed and talk about other agronomy inputs,” Gerdes says. “Sometimes, the producer comes into our office to talk about grain opportunities as well. However, most of the time, our agronomy sales staff has the opportunity to offer the contract while calling on the producer for agronomy and seed sales.”
Contracts for non-GM crops
Sunrise Ag Service Company, a full-service cooperative in Virginia, IL, also has offered variety-specific contracts, which include FS varieties that it alone carries in the area. Some DeKalb brand products also are on the approved list. “By offering premiums for these products, we have increased our seed sales to our patrons,” says grain manager Mike Beck.
Also helping build sales has been the cooperative's grower finance program. “The finance rate is based on activity with our company,” Beck explains. “The more the producer buys [e.g., inputs] or sells [e.g., grain], the lower the interest rate he pays.”
Among the central Illinois cooperative's more popular contracts are for non-genetically modified (GM) corn and soybeans for markets in Europe and Japan, and for hard endosperm corn for South American markets. The grain from these crops is sold through ADM and Cargill, as well as H & B Specialties, a food-grade grain marketer based in Pleasant Plains, IL.
Like Aurora Cooperative, Sunrise Ag Service has been contracting crops since the early 1990s. Asked why the cooperative has continued to form contracts, Beck responds, “Our mission is to strive forward to offer our producer-owners the optimum opportunities in the marketplace. As the industry changes, we must be able to adapt and change. Offering a variety of contracts gives our customers every advantage they need for showing profit at the end of the year.”
Growers who contract with the Illinois cooperative to produce non-GM corn generally can expect to receive a premium of $0.07 to $0.10/bu. Those producing non-GM soybeans can earn premiums of $0.40 to $1.00/bu. The average premium is $0.40 to $0.50/bu., Beck says. Over the past year, growers have received premiums of $0.07 to $0.17/bu. for hard endosperm corn.
When contracting, a retailer must have a good understanding of the delivery times the buyer wants, Beck says. Sunrise Ag Service generally receives buyers' calls for December through January and February through March and has between three and five days to deliver. However, some end users want to stretch deliveries into the summer, Beck says. In that case, the retailer needs to let growers know ahead of time so they can decide whether they want to store grain that long and if the premium is valuable enough to agree to this.
For most contracts to work, a retailer needs storage, and generally segregated storage. Because a contract usually specifies high quality, growers need to be able to dry down grain at low temperatures.
Beck advises retailers to learn the buyer's needs. If a buyer wants non-GM products, it will likely expect verification that the grain is indeed not genetically modified, for example. Sunrise Ag Service conducts strip tests of grain as it is brought across the scales.
The cooperative's agronomists also communicate regularly with contract growers to remind them of the importance of cleaning equipment properly as they go from field to field. “One Roundup Ready soybean in a grain cart full of corn can result in rejection,” Beck says. The cooperative also holds grower meetings and posts a Web site with information about specialty grains and proper management, such as establishing required border rows, low-temperature drying, segregation and approved grain treatments.
In the end, both Aurora Cooperative and Sunrise Ag Service are contracting to stay because they see benefits for their customers and their companies. Gerdes states, “We feel our long-term success will hinge on our ability to bring options and solutions to [producers'] farms. By doing so, we feel we'll become the preferred supplier to their operations.”
Preventing dissatisfaction
One of the biggest challenges for retailers who contract for delivery of grain is to handle a situation where the contract does not meet the grower's expectations (for yields or profits). To prevent this, each year prior to seed purchase, Sunrise Ag Service, Virginia, IL, publishes the listings for all of its sources of specialty grain programs, and any new restrictions, quality changes and premium changes. Grain manager Mike Beck says it is a hard lesson for both grower and retailer if a lot is rejected. That is why the retailer must focus on communication. In addition to regular communication about managing quality, Sunrise Ag Service sends daily e-mails with bids and market commentary.
One of the advantages of the contracts for non-genetically modified crops and hard endosperm corn, Beck says, is that they usually require hybrids and varieties to which area growers have been long accustomed. Therefore, there is little surprise in agronomic performance.
Todd Gerdes of Aurora Cooperative, Aurora, NE, stresses that before taking on a contract, retailers must understand that they may be taking on additional risk. “Many of these contracts require somebody to commit to delivery,” he says. “It is generally the retailer who accepts the risk. Although the grower may be ultimately responsible for delivery, in times of weather disasters, the retailer may feel the need to share that burden. Also, if the grain being contracted fails to perform as suggested, the retailer will feel the negative consequences. Appropriate research must be done before it is offered to the producer.”
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