Trading on Success
Cargill AgHorizons and Cargill Risk Management offer farmers the kind of innovative price-hedging tools once available only to large companies and financial institutions.
Few occupations in this world are as complex and challenging as that of the farmer. To be successful, a farmer must wear many hats: agronomist, grain marketer, mechanic, machinery operator and more. Unfortunately, the one that often affects their profits the most — grain marketer — is frequently the weakest link in that chain of capabilities.
Commodity markets are extremely complex and variable, so it can be enormously challenging to develop and follow solid marketing strategies. Studies have shown that two-thirds of farmers to sell their grain at a price in the bottom one-third of the seasonal range.
Emotions often play a major role in marketing decisions, and farmers — not unlike investors in the stock market — struggle to decide when to “pull the trigger” and sell their crop. Imagine price-hedging tools that could take the emotions out of that process. Such as a tool so sophisticated that it could guarantee farmers a minimum price that is higher than the average price during a given time period and the opportunity to sell at an even higher price under favorable market conditions.
Thanks to the collaboration and innovation of Cargill AgHorizons and Cargill Risk Management (collectively identified as CARM), farmers no longer have to imagine such resources. Since the first test marketing in 1997, when a handful of farmers used CARM products, demand has grown substantially. Today, roughly 12-15 percent of the total volume of grain handled by Cargill AgHorizons is linked to a CARM risk-management product.
Combining talents
As Cargill has shifted from the mentality of a commodity trading company toward a focus on providing customer solutions, Cargill Risk Management (CRM) and Cargill AgHorizons both saw some opportunities.
From its inception a decade ago, CRM has specialized in the development and sale of price-hedging products. In the process they developed substantial expertise in working with the wide range of financial instruments known as derivatives. Initially, their focus was on commercial food companies.
“A logical extension of that process was to look at ways to do the same thing for commodity producers,” says Jeff Seeley, vice president of CRM. “In fact, farmers have fewer resources than food companies and more need for help in managing their price risk. Unfortunately, our people in CRM didn’t have a complete understanding of farmers’needs.”
“Risk Management has the systems and the talent to create the products,” says Dennis Inman, Cargill AgHorizons’ customer solutions leader. “Our business understands farmers and how to determine what they need for grain marketing. We’ve been able to articulate those needs to Risk Management, which then created the products to get the job done.”
As the collaboration evolved, ideas began flowing both directions. Sometimes farmers would ask for a product that provided a certain kind of minimum price guarantee; sometimes they asked for tools to help them decide when to sell. Cargill AgHorizons would present those needs to CRM.
But ideas for new products also came from CRM, based on their knowledge of what derivatives can do. They’d describe an outcome, then ask their Cargill AgHorizons colleagues, “Do you think farmers would be interested in that?”
Since the collaboration began about seven years ago, the CARM team has made progress that is nothing short of spectacular. They now offer two dozen price-hedging contracts to help farmers manage their price risks.
Most importantly, they have established themselves as the premier developer and provider of these kinds of products for farmers. Although the products evolved from standard derivatives born on Wall Street, some are as sophisticated and complicated as any financial instruments in existence.
“No one else in the marketplace can offer farmers the wide range of products we have to help them manage their risk,” Inman says. That has helped Cargill develop a new face to farmers as an innovative company that goes beyond commodity training.
For more information:
Cargill AgHorizons – Performance Management Options