How Your Local Elevator Works
Prior to my life in the elevator industry I worked as a cash grain broker. And while the company I work for does handle several million bushels through the 5 facilities we own, I still work quite often in the broker capacity. Basically meaning I work to find the best market out there for my customers, help them manage spreads and different futures opportunities and go from there.
My goal in this capacity has always been to help growers learn to trade their bin sites like they were an elevator. Learning to maximize carry, watch for basis opportunities and enhance their margins. However I've found the more I focus on this side of the market structure the less farmers understand their local elevator. Many times this lack of understanding grows into misconceptions, rumors or hard feelings. So today we're going to discuss how your local elevator works and hopefully dispel some of the misinformation that's out there.
First and foremost, unless your local facility is into gambling and loves open risk exposure they are hedgers. What being a hedger means is you use the Chicago Board of Trade to offset your futures risk. When I purchase grain from a customer I immediately turn around and hedge that grain on the board by selling the correct number of contracts (a contract is 5000 bushels) to correspond with the amount of bushels purchased. This short position I have established ensures that if the board drops the difference in cash price will be made up when I rebuy the hedge on the board.
To make it more clear: if the board price is $3.50 and I buy cash corn I sell a contract on the board for the $3.50. If the board drops to $3.00 by the time I resell the cash corn I am able to make up the difference when I reown the futures on the board at $3.00. If the board rallies to $4.00 I not only get to send money to Chicago to keep that position open I have to buy it back at the higher level when I sell the corn originally bought.
Always remember the biggest risk in cash grain is the futures, hence the focus spent on determining futures moves and the ability to offset that risk via the Board.
So yes, while the elevator may resell the physical grain for a higher value they do not pocket every penny gained. Basically when I buy corn I focus on basis and carry to make my money; many times board volatility is actually more harmful to my bottom-line than helpful. If you believe that your elevator is getting rich or is getting ahead by buying your grain cheaper and watching it rally you are mistaken (again unless they like to gamble and in that case I might proceed with caution).
So if we don't make money by gambling on the board how do we make our money? Basis, carry and offering services. Back in the old days on farm set ups were a bit more few and far between, hence the growth of the local elevator business. A private entity or a group of farmers would come together, pool their money and build the facilities necessary to handle grain as it was harvested. As time has gone on farmer set ups have cut into the need for local elevators resulting in mergers, acquisitions or facilities being shuttered.
The fact remains getting grain out of the field at harvest and having a place to keep it once it is cool and dry is as important as getting it planted in the first place. As all of you know the costs of building and maintaining these facilities are not minor either. To make bins pay for themselves you hope that basis improves beyond harvest and spreads offer good opportunities for carry.
Just as with anything else in the commodity world the cost of space will hinge directly on local supply and demand. In years of tight supply availability or strong demand you will see strong basis levels paid or cheaper storage costs offered. In years of high supply or low demand space becomes more valuable hence the higher storage costs or wider basis levels.
Just as you wouldn't pay 30 dollars more a ton for fertilizer than the current market price, an elevator is not going to or at the very least shouldn't pay more than the going market value or give their space away for free. It is important to remember that unless your local elevator has a direct line to an end user they have to sell into the same market you are if they run out of space.
For instance, locally for me I have 2 different ethanol plants in my backyard. Many times at the start of harvest they will pay values that I cannot match. It's not because I'm trying to undercut my producer, it's simply because my number one goal at harvest time is to provide an open door and a place for my customers to deliver grain as it is harvested. If I pay through the nose for grain and find myself full I have to then sell grain at the current market price to keep my doors open. Therefore if I match what my local buyer is paying only to fill up and watch basis deteriorate I have 2 options, close my doors to deliveries and sit on the grain I've purchased, or lose money by making sales.
I love my customers, don't get me wrong, but if I'm going to buy bushels at a loss I may want to reevaluate my charity status with the IRS.
As a customer it is important you keep the services offered in mind when determining where to sell at the peak of harvest. And in times where your local end user is full understand what your local elevator is trying to do just to keep their doors open to allow you to finish harvest. At that point ask yourself what is more important getting harvest wrapped up as soon as possible or waiting for the pipeline to reopen chancing field loss while you do so. Don't forget to factor in hidden costs when making decisions.
Of course there will be places out there that are exorbitant in their fee/basis structure. If you have a truck and can travel you can avoid those places, if you don't or can't they will welcome you with open arms. Complain as much as you want, but in reality that's how it works in all business, a buyer will pay as little as the market will allow. Someone will always be paying more, but it's a matter of how far you need to go to find that bid, don't forget even with cheap fuel trucking is never free.
When looking at the cost of space, it is important to also have a better understanding of how storage costs are decided upon. As we've already established, building and maintaining bins has associated costs. Having your own on farm storage when managed correctly allows you to use the market in your favor to offset these costs. It is important to remember the gains in the market through basis strength or carry are there to benefit the owner of the steel.
The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer.