Make Sure One of Your Best Friends is Your Elevator Manager

By Betsy Jensen

Your elevator manager needs to be one of your best friends: Have you ever thought just how much money you’re placing in their hands every year?  A 2,100 acre corn, wheat and soybean farm probably has grain sales over $375,000, and most of those sales are given to one person. Would you trust your neighbor with $375,000? But yet many farmers don’t put much importance on their relationship with their local elevator manager. 

Jerry Kramer, general manager at Harvest States in Fergus Falls, MN, says communication is the key to working with your local manager. “A farmer needs to communicate what he needs. Is he looking for a specific price? Or maybe he needs to move bushels for cash. If we’re both on the same page, it makes things easier for both of us.”

Jeff Blasowski, manager at Peavy Elevator in Grand Forks, ND, emphasizes the same. “Information has to be a two-way street. Most farmers sign a hybrid contract [basis fixed or futures fixed], and I never hear from them again. An elevator manager can’t help you, unless you tell him exactly what you need and are looking for.”

Blasowski also stressed the importance of firm numbers.  He would like to see an open order— instructions to sell at a certain price that remain in effect until the order is either executed or cancelled—instead of  “I might want to sell at $3.25.”  An elevator manager doesn’t watch the DTN screen all day, and unless that order is placed, there is no guarantee a manager will see the price reached, much less be able to get a hold of an equally busy farmer to let him or her know that prices are nearing a target.   

Kramer stresses the importance of having a marketing plan, and his elevator recently hired someone to work more closely with farmers on setting up a marketing plan, and using a computer program called Marketeer, which was developed by Country Hedging and the University of Minnesota’s Center For Farm Financial Management. Both Kramer and Blasowksi recommend looking at pricing opportunities a year in advance.  Basis is typically available 10 months before delivery, especially for new crop bids, but the futures for 2002 corn, wheat and soybeans are already trading.

Harvest States and Peavy have specialized contracts exclusive to their elevators such as “average price,” “value plus,” and “managed marketing.”  One of the easiest to explain is an average price contract, and similar versions are available at each elevator. Farmers can designate a specific time period and receive the average price during that period.  For example, grain prices have a seasonal tendency to rally in April and May. You can pick a 10 week period from mid-March through the end of May and you will receive the average price offered during that period. You won’t hit the spring high for your sales, but the spring high will be calculated in your average price. An average price contract takes some of the pressure off of making grain sales, since you can still take advantage of higher prices without having to pay a call or put option premium. 

The managed marketing contracts allow you to turn over your bushels to a professional who will do the marketing for you.  You sell your bushels, but the grain trader buys and sells those bushels for you using futures and options. This contract is a little more risky, but you could receive a better price.   The value plus contracts give you a premium on your old crop commodity by selling a call option for you.  Many farmers have thought about selling call options, but the threat of a margin call kept them out of the market.  Now the elevator will sell the option, give you the premium up front and meet the margin calls if necessary, but you are obligated to deliver more grain if the price rallies above your strike price.  If you instruct the elevator to sell a March Mlps Wheat $3.80 call, and the futures price rallies above $3.80 in March, you are obligated to deliver more wheat.

Elevators also use delayed pricing contracts, to help farmers who need to sell, but feel prices are going higher.  You lose control of the grain, but you don’t have to set the price until the contract deadline. There is often a fee associated with these contracts, but if you feel prices are going higher, the fee could be worthwhile.

The contracts aren’t intended to make grain marketing more difficult, but instead offer a simplified way to make a grain sale. Not all elevators offer these specialized contracts, so check with your local elevator for more information about the types of contracts or sales arrangements they may offer.

Elevators fight hard to attract bushels, and the market alternatives offered by each get your bushels there, which is their objective. “I want to handle the bushels and get the repeat business. That’s what’s in it for me,” says Blasowski. Thus, don’t be afraid to discuss sales terms that may be negotiable.  One common problem is the heavy discounts with low protein wheat.   Most elevators can often get a good feed wheat bid at some point during the year. If you let your manager know ahead of time that you are looking to sell some 12% protein wheat, he can let you know when a good bid appears.  

It’s also important to be informed when you bring samples to an elevator.  If a neighboring elevator has smaller discounts or a stronger basis, ask your manager about the difference.  It could be just a different bid, and your tip could help him find that better bid.

As well, don’t be afraid to ask your elevator manager questions. This is your grain, and you are in charge of when and where to sell it.  Don’t expect your elevator manager to tell you if prices are going higher or lower—his crystal ball is no clearer than yours. Instead, ask what marketing tools he may have that would help protect you from price risk in a given time period. You might be surprised to learn that your elevator has a lot more to offer in your marketing effort than you thought.

Establishing a Marketing Price Range

Sue Martin, president of Iowa-based Ag. & Investment Services, Inc. and a regular analyst on the nationally syndicated TV program “Market to Market,” offers the following worksheet to help producers establish a marketing price range:

A) What was my cost per acre last year? __________

B) Is there anything that made last year different from a “normal” year?

 For example, higher than normal fuel costs or lower-than-average

 herbicide costs? If so, factor these costs in here. +/- __________

C) What is the current rate of inflation? (Now it’s about 3.4%)

D) What is the expected increase in cost of production due to

 inflation?  (A +/- B) x C = __________

E) What is my expected production cost per acre? (A +/- B) + D =__________

F) What can I expect to yield per acre this year? __________bu/acre

G) What is my expected cost of production per bushel? E/F =__________

H) Add a reasonable profit margin on to your expected cost of

 production to establish a price goal. __________

The range between your break-even point (line G) and your price goal (line H) can be looked at as your target price range. When prices move into this range, you should consider marketing alternatives.