Taming the Bulls & Bears

Grain Markets Remain Volatile - Managing the Margin Call Risks

by Betsy Jensen, Ag Commodity Instructor, Northland Community
& Technical College, betsy.jensen@northlandcollege.edu

In my wildest dreams I never could have imagined such large swings in grain prices.  Limit up prices day, after day, after day, and even limit up and limit down within the same day. It is enough to give a grain merchandiser whiplash, and some buyers have decided to get out of the market. The Andersons, a grain buying firm in the Eastern Corn Belt, announced they are not going to use hedge-to-arrive contracts for the 2008 and 2009 crops. You can only sign a flat cash price contract or basis fix for the 2008 crop year, and for 2009, they are allowing only basis fix contracts.

Spring wheat producers do not work with the Andersons, but one local elevator in my area is not allowing farmers to sign a hedge-to-arrive for 2009.  You can sell a 2008 hedge-to-arrive, for a fee, but the manager said he just cannot figure out how much to charge to cover the elevator’s potential margin calls for the 2009 crop.  Elevators that have never had to borrow money in the past, now have several million dollars in margin calls on the books.  It’s a whole new world, and elevators are trying to figure out where to fit in.

So while elevators are trying to manage their risk, farmers are left hanging in the wind.  If you want to sell the 2008, 2009 or even 2010 crop, your choices at the local elevator may be limited.  If your elevator will allow a hedge-to-arrive, there will be a per bushel fee assessed. 

The good news is that commodity brokers are a dime a dozen, and they will be more than happy to sell your 2008, 2009, or 2010 crop on your behalf. The bad news is that you have to make the margin calls.  Do you have a line of credit or an understanding banker?  If you sell wheat at $10, and it rallies to $15, do you have access to $5 per bushel to send to your broker?  If your sale is for 2009, you may have to carry that $5 bushels for two years until you can deliver the cash wheat.  Elevators are reluctant to take that risk and are transferring the margin call risk to the farmers.  Can you handle the risk?  Do you understand the risk?

The on-farm profit potential for 2008 is exceptional, but nothing ever comes easy.  Wherever you have large profits, you have increased risks.  I am sure that elevators are operating on a larger profit margin than they were two or three years ago, but the margin might not be large enough to justify the margin risk, so some have decided to transfer the risk to farmers.

Do you pass up the $10 wheat sale because the elevator is going to charge you a dime?  Maybe the elevator won’t even buy your $10 wheat out of fear the market will go to $15.  If you want to guarantee yourself some profits on the 2008 crop, you may need to pay the dime for the hedge-to -arrive, or you may need to call your broker and assume the margin call risk yourself. 

If you decide to begin trading with a commodity broker, make sure you have adequate credit available for margin calls.   I know many bankers who fully understand the mechanics of selling crops on the futures market, instead of the elevator. If your banker does not understand margin calls and a trading account, you may need to find a new banker.  If you do not need an operating line of credit, you may want to establish one, just in case. Your banker may want to receive a copy of your trading statements, just to make sure you are hedging wheat instead of speculating in pork bellies, but the banker should understand that your $5 loss in the futures market is offset by an increase in your cash commodity. 

There will be more hurdles in our quest for 2008 profits.  Whenever farmers make profits, there are plenty of other people down the line who want a piece of it. If you want to take advantage of these profitable prices, you may have to change the way you do business, but the profit potential justifies the change. 

Jensen puts her marketing strategies to work farming with husband Brian near Stephen, Minn.  Her market education activities, including this column, are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council.