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  • Grain Merchandiser Q&A

    Ask anything: I'll try to give you the best answer I have as to why and how things work the way they work in the grain industry.

    Example:

    Q: Merchant, I have been offered free delayed pricing by my elevator - and have until the end of October to price it - am I better off pricing today or holding out while on DP. I think prices are going higher and I want to capture the rally. I need to move grain before harvest and I think the rally will happen sometime in September.

    A: There is no such thing as free. Delayed pricing passes ownership of grain to the buyer. When the buyer gets possession he may do whatever he wants with it. Elevators can and often do sell this grain in local markets and buy futures against the sale to protect themselves against a futures price rally.

    The elevator has a short basis position against your DP grain, but has moved physical bushels into the market place - thereby pressuring the basis. When you finally decide to price your grain on the last day of the DP program (which almost always coincides with harvest) the elevator sells back the long futures and captures the spread between the basis where they sold it and where you priced it out.

    August 25th
    Bids: Elevator: -.50z, Plant -.40z

    August 25th-September 1st
    Several farmers bring in total of200,000 bushels of DP grain to the elevator.

    September 2nd
    Elevator sells 200,000 bushels of DP grain to the ethanol plant at -.30z. (Gets $.10 push for volume) and buys 40 contracts of December corn to hedge the futures.

    September 3rd
    The plant, no longer needing as much corn as they did before, lowers their basis to -.50z
    The elevator -always trailing the plant by 10cents, lowers their basis to -.60z

    Rest of September
    Basis plods along and slowly creeps down to new crop values. Farmer never sells the DP because he always waits until the last day of the program believing that prices are headed higher still. Futures are bland.

    October 31st
    DP program is up and farmer must set price on his corn. It is the middle of Harvest and basis is poor. (He has waited until the very last day of the program as he always does.)

    Bids Elevator: -.70z, Plant -.60z.
    The elevator prices all of the farmer corn out at -.70z and removes his long hedges.
    The elevator sold the farmers corn at -.30z and priced it out at -.70z

    The elevator has made $.40 cents on the sale of your DP grain (less freight and handling).

    December 1st:
    The elevator holds a farmer appreciation and gives the farmer a hat and a burger.
    The farmer goes home satisfied. Futures never rallied and he gave away $.20/bushel in basis.

  • #2
    Thanks for explaining it. I figured that's how it went.

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    • #3
      I should have noted that the ethanol plant is also doing the same thing. As farmer corn comes in on DP and it is used, they are buying futures against it as well. A 60mg/year ethanol plan is buying ~1.8m bushels each month. They may get several hundred thousand bushels of delayed pricing delivered to them in that time. Combined with the elevator's DP sales, they may get half of their coverage brought to them through delayed price means. The farmer has fed the market without making it pay.

      [COLOR="rgb(0, 0, 0)"]I see a lot of threads on here talking about the rail being the reason for poor basis on corn. It's part of the problem, but I would say that delayed pricing or NPE contracts are just as much to blame. [/COLOR]

      If you really want to have fun with delayed pricing take a look at old crop beans:

      Sep 2
      Bids: Elevator +275x, Processor +325x

      Sep 3
      Farmer: I am looking to move my beans. I have missed the boat on high prices. What can you offer today?
      Merchandiser: Cash beans today are $13.10 @+275 the Nov. We are also offering "free" DP until Oct 15th.
      Farmer: Those beans are going higher because (insert irrational reasoning) -no way I am pricing them today, but I need to haul and make room for new crop.

      Sep 4-10
      Farmers bring in 100,000 bushels of beans and put them on delayed pricing. The program ends on Oct 15th.

      Sep 11
      Bids: Elevator +325x, Processor +375 (the final push before old crop)
      The elevator sells 100,000 bushels of beans to the processor at +375x and concurrently buys 20 contracts of November beans.

      Rest of September
      Basis plods along and slowly creeps down to new crop values. Farmer never sells the DP because he always waits until the last day of the program believing that prices are headed higher still. Futures are bland.

      October 15th
      DP program is up and farmer must set price on his beans. It is the middle of Harvest and basis is poor. (He has waited until the very last day of the program as he always does.)

      Bids Elevator: -.50x, Plant -.20x.
      The elevator prices all of the farmers beans out at -.50x and removes the long hedges.
      The elevator sold the farmers beans at +375x and priced it out at -.50x

      The elevator has made $4.25/bushel on the sale of the DP grain (less freight and handling).
      That is FOUR DOLLARS AND TWENTY-FIVE CENTS.


      December 1st:
      The elevator holds a farmer appreciation and gives the farmer a hat and a burger.
      The farmer goes home satisfied. Futures never rallied and he gave away $4.25 bushel in basis.


      As you can see, only the numbers change in this story. The farmer does the same thing every time.

      The bean example is a bit on the extreme end, but there will be elevators that pull off similar sales of beans this year. Last year elevators did it with both corn and beans.

      I recall talking to another merchandiser about how he was in the bar buying drinks for some of his farmer customers. (He had just made $2.00/bushel on their DP corn after basis crashed into new crop.) He overheard someone talking about how he wouldn't be in business long buying this big group booze - spending money like it was going out in style etc .. etc...)

      He just laughed and bought them more drinks with their money.
      Last edited by GrainMerch1; 09-02-2014, 11:03 AM.

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