Go Beyond Dumping Grain

Country elevators can be a key source for helping producers develop and execute grain sales

By Betsy Jensen and Tracy Sayler

Some country elevators can help producers develop and execute grain sales, beyond merely providing a pit to dump the grain itself. By communicating with customers about sales opportunities, offering marketing plans and innovative contracts, a country elevator may also benefit by building its customer base, remaining competitive, managing logistics better, and maintaining profitable producer customers.

Some elevators offer more services than others, a function of size and available personnel. They must also take into account the resources required to provide such services, including administration and accounting costs, possible risk exposure on legal issues (having all documents signed and risks disclosed to customer), and customer feedback.

Southwest Grain, Gladstone, N.D., conducts occasional marketing meetings throughout the year, and tries to keep in touch with customers about sales opportunities and strategies. The communications process goes both ways. “If we’re communicating, it helps us get an idea of what you want to do and to call when the opportunity presents itself.  And when the opportunities come along, you’ve got to jump on them, because they’re usually not going to last long,” says Brian Fadness, a broker with Southwest Grain.

No-one can predict what the market will do, and no strategy is fool-proof. For example, Fadness says prices last year ran inversely from their usual seasonal tendencies—rising through the summer, instead of falling into harvest, as they typically do. Still, Fadness says that as customers learn to use and take advantage of various strategies, they often comment that “I should have priced more.” 

Soft prices this summer didn’t have too many growers actively seeking forward pricing. However, those who established hedge-to-arrive (HTA) contracts earlier should benefit, if they were able to lock in good futures levels.

Rocky Dufault at the Argyle Co-op Warehouse Association is not a big fan of price later contracts.  If grain has to be moved, he would prefer farmers consider a basis fixed contract, which will leave the futures price open.  A flat cash contract can often be better than a hybrid contract like a basis fixed, but the contracts do offer some flexibility. “Use caution if you want to roll a basis fix contract,” he says.  Dufault is willing to buy back sales on paper or with options, but says it’s important to look at the carry or inverse before making that decision.

He believes one of the major factors in cash grain sales this year is going to be the premiums and discounts. “You may be tempted to put low quality wheat under loan instead of taking an LDP, but that might backfire,” he warned.  “If we have a sizeable LDP, it might be worth it to take it, and wait a few months for the elevator discounts to ease. You’ll still get discounted, but not nearly as bad as you would at harvest.”

If anything, find a starting point to begin making sales.  “So what if you lose $1 when wheat rallies from $5 to $6? That dollar you lose from $5 to $4 is a lot more painful,” says Dufault.

Joel Moore, general manager of Arthur Companies, based in Arthur, N.D., agrees that too many farmers still hold out for the top of the cash market, only to miss out on sales opportunities. “Market it in smaller increments, and shoot for a better average, not for the peak.”

Moore says farmers have a wide range of marketing skills.  “You’ve got to customize your approach to each individual.  There are some guys whose marketing habits aren’t going to change too much.”

Lance Kalmbach, Sun Prairie Grain, Minot, N.D., says one bad habit that some farmers have is selling grain when they need money. “The thing I like to preach is to have a plan in place.  The trade knows when grain comes out of loan or when farmers need the bin space at harvest, yet every year trucks come in during those times because they need to pay bills.   It’s good to have sales in place before you’re forced to sell.”

Kalmbach says some strategies (trading options and futures, for example) can only be executed through a broker, while others can be used without the requirement of a licensed broker.  Good marketing professionals will help farmers understand and use the most appropriate strategies.

One strategy that Kalmbach says Sun Prairie Grain is doing more is the “Decision Rules Contracts” (DRC®) which automatically sells a certain amount of grain each day at a specified price. It’s designed to effectively sell grain on an average for a better price. Learn more about the program online at www.e-markets.com/docs/risk_management.html.

Start sales early

If you’re beginning to sell your 2003 crop, you’re already too late.

Jerry Kramer, Harvest State Elevator, Fergus Falls, Minn., said a marketing plan needs to be developed much earlier—early winter—especially for contracting possibilities.

If making cash sales, watch for discounts and premiums during harvest. “The winter wheat crop is really good, and big bushels mean low protein. They’re going to need our spring wheat crop for blending, so look for premiums and discounts.”

The decision at harvest to sell or hold needs to be based on several factors, he advises.  “If it’s coming to the elevator, you need to watch storage and interest costs to determine how long to hold.” When storing wheat on-farm, look at the carrying charge to see if it would be profitable to sell the crop for later delivery such as after Jan 1.   

 “If you need to make sales at harvest, look at buying a call option instead of paying storage,” recommends Tom Nelson, Beltrami Farmers Elevator, Beltrami, Minn.  He reasons that while you may make money on a call option, storage costs are never recoverable. “Look to sell any time prices are over the loan rate,” he advises. “We already know that the winter wheat crop is large so we won’t see any supply scares and if your crop looks good and you get the bushels, you may be able to lower your price expectations.” 

Lake Region Grain, Devils Lake, N.D., invested in a probe truck about a year ago to help the elevator more precisely know the quality of grain it can supply, which in turn helps market the grain better. “We know better what we’re trying to sell.  We can probe bins to match the qualities wanted in the market,” says Reed Ihry, with Lake Region Grain.

Ihry says that producers, elevators, and merchandisers in the grain supply chain are all after the same thing: to make grade on what the market is trying to buy.  The probe truck allows more accurate sampling, and a better assessment of what grain is worth, so that there are no surprises.

“Our goal with the probe truck is to know upfront what quality grain will be.  For farmers, we can quote a more realistic price upfront, because we don’t have to deal with unexpected discounts,” says Ihry.  “The better we know what we have, the better we can portray a sample and know what we have to sell.”