In the Ag market, there’s one consistent problem that pops up repeatedly: the fluctuation of price unexpectedly against previously invested costs into the commodity. How does a producer insure themselves against dropping prices when there’s no way to lower the cost invested in the commodity months ago?
That’s why risk management and price insulation techniques are an essential area for agricultural producers to explore. While most people tend to look into Ag marketing via futures commodity trading, price pooling is another measure that can achieve a similar effect for mass benefit.
How Price Pooling Works
Price pooling is essentially a group initiative by and for producers. Price volatility in the Ag sector is often a result of the free market, whereby speculators are free to negotiate different prices with different sellers. While the competition is essential to ensure fair pricing, this can often work against producers in general, as buyers pit suppliers against one another.
Price pooling works when an association of farmers or agricultural producers band together to form a local association that strikes a deal with the government or regulatory body. This agreement covers the setting of a guaranteed price.
If the commodities sold by this association don’t meet the agreed-upon price point, the shortfall is supplemented. However, any surplus is retained by the association for future use as funds or distributed to the producers.
Why This Is Beneficial
The advantages of a system like this are numerous. First, the cash flow position of producers can make a massive difference to their financial circumstances. Since agricultural cycles are so long, farmers usually have to wait months before they can start paying off any obligations they have. The initial payment helps them jump-start their fiscal cycle.
Price pooling also ensures producers receive a steady ROI, given that agricultural losses are usually unforeseeable. Moreover, the steady price point and initial payment ensure that a consistent commodity marketing schedule works over a more extended period.
By forming a pooling handler association, producers are also fostering collaborative ties with other producers in their community. The economies of scale benefit the producers in this scenario.
Furthermore, the agricultural commodities marketing association formed as the pool handler also helps producers gain footing in lending markets by offering proof of price security. This allows producers to obtain more substantial loans for growth with lower interest rates than if the bank were factoring the price volatility into the terms.
How Can I Get Started?
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