Marketer: Herb Hart, Hart Acre Farms, Napanee Ontario

Overview of the Business

Hart Acre Farms is a 3,000-acre cash crop operation located near the north shore of Lake Ontario, just east of Napanee (between Belleville and Kingston). The farm is owned and operated by Herb Hart, a hard working individual who learned early in his career that asking questions is perhaps his strongest attribute and the most important characteristic of a successful marketer.

Overall, Herb owns 1,600 acres of the total acreage that he farms. The remaining acreage is rented from neighbouring property owners including a First Nations reserve. His 2007 crop plan is as follows: soybeans – 1,600 acres; winter wheat – 600 acres; corn – 600 acres; and white beans – 200 acres. These crops are grown as part of a two-year rotation with soybeans being his primary crop and hence one-half of his total acreage. All other crops are grown in rotation with soybeans.

Hart Acres originated as a dairy farm owned and operated by Herb’s father. However, as his father approached retirement age, the family decided to sell the dairy cows and quota. Herb continued as a cash cropper. The Hart Acres Case is an excellent example of an individual driven to succeed and committed to a marketing strategy that ensures profitability, and discipline while maintaining a degree of flexibility in response to market conditions and selling opportunities. The principles guiding this strategy are driven by an incredible thirst for information. This drive includes Herb’s deep commitment to understand current market and crop conditions, both domestic and worldwide; the factors impacting demand; the factors impacting price; price histories; crop disappearance; and perhaps most importantly, detailed cost of production information for his own crops.

Marketing Strategy

The overriding objective of the Hart Acre’s marketing strategy is to lock in profits when the opportunity arises. This requires two key fundamentals:

· Detailed knowledge of production costs. Herb knows exactly what his costs are on a per unit basis (per bushel) for each of the crops he grows.

· Carefully following markets and potential buyers on a daily basis. For example, Herb has already locked in some soybean contracts for delivery in 2009. To this end, he subscribes to a daily market service (DTN), reviews prices and markets on a daily basis and keeps regular contact with numerous brokers, buyers and other producers.

Herb’s guiding philosophy is summarized simply as follows:

“ You’ll never go broke, if you lock in a profit.”

This of course means that you will not always get the top price for your crops. However, it does mean that you have a foundation from which you can plan with a higher degree of certainty.

Marketing History

Herb Hart has operated the current cash crop operation since 1994. The Hart family, and in particular Herb’s father before him, has been farming in the area for many years. This included the dairy operation which was discontinued with the sale of cows and quota in 1989. Subsequently Herb began a beef backgrounder operation with 500 stocker calves on feed. However, this did not prove to be financially successful with substantial losses. Thus by 1992, Herb made the decision to discontinue all farming operations and went into the trucking business. The Hart's, however did not sell the farm. Herb’s father, although semi-retired, maintained the farm by growing some crops and keeping some cattle.

In 1994, the opportunity to generate some cash by selling clay from the farm as a liner for a land fill site, gave Herb the impetus to re-enter the farming business. This time he chose to be a cash cropper focusing on the production of soybeans and winter wheat. Herb also considered corn, a commonly grown crop in southern Ontario[1] but made the decision not to grow it. From his perspective, the crop was too expensive to grow in view of the cost of inputs, the expected yields and prices. However, in recent years, Herb has included corn as part of the cropping mix in view of the rapid increase in recent corn prices.

The preliminary choice of winter wheat and soybeans also distributes the application of time and equipment over a longer season. Winter wheat is sown in the fall and harvested in July of the following year. Soybeans, corn and white beans are planted in the spring and harvested in late September and October.

Herb’s focus on marketing grew from the following observation:

“Over the years, I watched the local dealers and noted that they take a slice on everything: the inputs you buy; the trucking; harvesting (if you use their custom services); and of course, the final crop commodity they buy from you.”

Adding to this, Herb made another interesting point:

“It always seemed that the traders made more money than the growers!”

This led Herb to make two critical conclusions:

1. Find out who are the actual end-use buyers for your product.
2. Don’t sell your entire crop when everyone else is selling (at harvest time).

The first conclusion drove Herb to figure out who was actually utilizing the crop and therefore trying to sell direct. This avoids the many commissions and handling fees that you will pay otherwise. The second conclusion requires a careful study of markets and prices all year long.

The Current 2007 Marketing Plan

Hart Acres 2007 marketing plan by crop is described below. Note: In the interest of protecting proprietary information, the actual buyers are not identified. The plan is as follows:

Winter Wheat: Total estimated production: 1,200 tonnes to be marketed as follows:

· 800 tonnes contracted in March 2006 for delivery in July 2007.

· 200 tonnes contracted in April 2007 for delivery in July 2007.

· 200 tonnes to be sold on the cash market.

Soybeans: Total estimated production: 1,200 tonnes to be marketed as follows:

· 400 tonnes locked in for November 2007 delivery on basis contract (plus $.82).

· 800 tonnes to be sold on the cash market.

Corn: Total estimated production: 3,500 tonnes to be marketed as follows:

· 1,000 tonnes sold on contract for delivery in October 2007.

· 2,500 tonnes to be held in storage until January 2008 and to be sold to a major corn syrup processor.

White Beans: Total estimated production: 200 tonnes to be marketed as follows:

· 100 tonnes booked at a price with the buyer and delivered at harvest time.

· The remainder to be sold on the cash market at the same time.

The plan illustrates Herb’s strategy to lock in a proportion of each crop yet keeping the flexibility to sell on the cash markets. This year, he has taken more cash market risk, due to the substantive price increases that are currently at play. For example, approximately two-thirds of his corn production is not locked in. This differs from his approach in past years, when it was his practice to lock in two-thirds of production. However, in the last six months the demand for corn due to the rapid expansion of the U.S. ethanol market has driven prices upward. Thus in Herb’s view, the downside risk is limited.

The July 2007, Winter Wheat contract illustrates both downside risk and the upside opportunity cost of commodity markets. When Herb locked in this contract last year (March, 2006), the agreed price was $160 per tonne (price on-farm). By December of 2006, the cash price dropped to a low of $110 per tonne – making the contract look very good indeed. However six months later the cash price (and currently) is around the $210 per tonne level - thus the contract means the foregoing of $50 per tonne. Nevertheless, Herb makes it very clear:

“I knew when I agreed to the contract, I could make a positive margin. And so did my banker. Without it, I may have had trouble getting the financing to grow anything at all!”

And this is precisely the point. The last few years have been very difficult for crop producers all across Canada. Prices have been low and bankers have been increasingly reluctant to lend to producers who do not have defined marketing strategies and the ability to ‘lock in’ a profit. While the outlook for 2007 is much more positive, Herb admits:

“The last three years have been rough. I have spent more time studying the markets in the past three years than I did in the previous 10.”

Herb also takes full advantage of local storage structure. Since his farm is located close to the St. Lawrence Seaway, there is a large grain elevator located in Prescott, Ontario, which is owned by the municipality. Herb uses the elevator to store corn on a per-tonne, per-day basis. This enables him to cost-effectively hold stocks without having to sell at harvest or having to invest in his own storage facilities. It also enables him to market directly to grain companies who are looking to fill an ocean bound or lake freighter from time to time. With respect to the latter opportunity, Herb capitalizes on two fronts: (1) avoiding dealers or brokers by negotiating directly with the grain company; and (2) dealing with a motivated buyer who has a real time need to fill a ship.

Key Information Sources/Influences

Information is key to Herb Hart, who has a natural and arguably an intense curiosity to understand and know the markets within which he is dealing. Using his own words:

“I didn’t have enough schooling, so I use other professionals and information sources for advice.”

And the sources are many including:

• Ag-Alert - a daily newsletter issued by Deputter Publishing, a respected commodity analyst located in London, Ontario.
• DTN marketing services – an online pricing and marketing service that Herb studies daily.
• Major commodity buyers such as W.G. Thompson; the Hensall Coop; JRI (James Richardson International) and London Agricultural Commodities Inc.
• Another monthly newsletter issued by Robert Huckle, a broker located in London, Ontario.
• Other growers – a few years ago, Herb traveled on a trip to Brazil, sponsored by a corn seed company. This put him in touch with several other Ontario-based crop producers, many of whom he keeps in regular contact. One grower in particular is a very valuable source of advice.

Herb has also taken every hedging course available offered in the area by commodity brokers. He estimates that to date he has taken at least six courses. Herb considers the understanding of hedging strategies to be vital to the future of his business. Yet, the level of participation among fellow producer puzzles him:

“Last year there was a course put on for growers for this four-county area. Only 20 producers attended! What’s with these guys?”

He went on to say:

“If the full extent of your marketing strategy is to sell to your local elevator at harvest time, how can you budget?”

Interestingly, Herb noted that a couple of local producers did exactly that and they’re no longer around to take advantage of the current upturn in crop prices. Herb also attempted to start a marketing club in his area designed to bring together a group of crop producers to study the markets, learn together and take on hedge positions, either for real or for the purpose of learning. However, there was not sufficient interest to sustain the club.

Another key source of information is Herb’s involvement as the county director for the Ontario Federation of Agriculture. This provides another opportunity to make contacts and learn about what is going on. Herb is currently a member of the Energy Working Group with a particular interest in biodiesel developments. He is watching this closely since it may present a new opportunity for the marketing of soybeans as well as being a participant in an actual production facility. While he is not fond of the political arena Herb commented:

“ You have two choices: do you want change to impact you by design or by default? If you want to succeed in your industry, you have to get involved!”

Key Challenges

When asked to identify the challenges to his business, Herb identified several issues:

• Changing market conditions - in his view, the price increase driven by U.S. energy policies and the production of ethanol are not sustainable.

• New ethanol processing technologies - further to the previous point, Herb feels that it is just a matter of time before cellulose will be the primary feedstock for the production of ethanol instead of corn or wheat. This will create a major adjustment to grain prices.

• Labour - as Hart Acre Farms grows, more and more of the work must be done by hired staff. This is a very serious challenge for the business. Skilled labour to operate equipment is difficult to find. This is critical for seeding and harvesting. Herb still relies extensively on his retired father for assistance in these areas.

• Managing your costs – clearly one of most critical factors that a crop producer must constantly manage is keeping costs in check. Thus you must evaluate everything that you do, the crops you grow, the inputs you apply and the investments you make to ensure that you keep your costs in line. To quote Herb: “Deal locally if it makes business sense. Otherwise, you have to go where the best prices are being offered.”

Lessons Learned

Hart Acre Farms and the style and personality of Herb Hart provide a number of lessons to crop producers operating within the crop commodity markets:

1. Know your business inside and out – the key to success is to be very good at what you do. In this regard, know your soils, your local climate, what crops you can grow productively and profitably, and your local market conditions and/or special features or infrastructure. In Herb’s case, he did not grow corn until increased prices made profitability more likely. Further, Herb takes full advantage of local market features such as a major corn syrup processor and the availability of storage space located on the St. Lawrence Seaway.

2. Know your costs – a key lesson to be learned from this case, is the importance of knowing the exact costs of production for each crop. Knowledge of these costs is the first step to knowing the price you need to achieve a break even position in the market.

3. Know your markets – while seemingly an obvious point, it needs to be stated since many growers simply sell to third parties such as brokers, local dealers or elevators. Understanding who actually uses the commodity and identifying the actual buyers is a critical piece of market information. Then, determine how best to sell directly to that buyer. Finally be sure to study prices and historical price trends with the knowledge that considerable variation occurs throughout the year.

4. Lock in returns when your margins are positive – the essence of Herb Hart’s marketing philosophy bears repeating: “You never go broke if you lock in a profit!” This approach is key to Hart Acre Farms, and the operation would not be in business today if this principle had not been adhered to. Clearly, a question that arises each year will be the proportion of the crop to be locked in. The answer will depend upon anticipated future prices and the financial situation of the operation itself.

5. Never stop learning - Herb Hart demonstrates an insatiable desire to learn. This attribute is probably the most important lesson to be drawn from this case. Clearly market conditions are constantly changing. The successful marketer responds in three ways: (1) identifying good sources of information; (2) using good advisors – both professional and personal; and (3) learning everything you can about the markets in which you are selling. Herb Hart clearly embodies this response in his approach to his farming business.

[1] Most of the Ontario corn crop is grown in the south west area of the province, some 400 km, south and west of Hart Acre Farms. This region has higher heat units and large tracts of Class 1 soils resulting in higher yields. By comparison, yields in Eastern Ontario where Hart Acre Farms are located are somewhat less.