What Challenges Face Grain Marketers in the Year Ahead?

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

One of the biggest questions on producer’s minds today is “How do I manage this volatility?” I sold my wheat too early at low prices. What can I do to offset lower sales? I did an HTA (futures first, delayed basis) on my wheat and basis has continued to deteriorate, now what?”

Pricing grain is a difficult task. Choosing values to sell into is difficult at any given time, but splitting futures and basis into separate sales has its challenges. If you price only futures and not basis, of course you expect basis to get better. Ask yourself why should it get better? Do you expect the Canadian dollar to deteriorate before you deliver on the futures contract? Most importantly, with basis often a reflection of local supply and demand, try to
look ahead at what crops are going in the ground locally. Are Ontario farmers going to plant more bean acres this spring and reduce corn acres? Are we buying soybean acres in the U.S. (across the border in OH and MI)? What is the demand base in Ontario going to be for corn in the upcoming year? Weather can play a key role in basis. If yield is disappointing, even though acres are large, basis will improve as buyers look for harvest ownership.

Something producers are not used to is a market that’s unwilling to purchase your grain. We’ve always had the luxury of selling grain whenever the price was attractive. If you have never understood how elevators manage their grain positions you will after this year. If a merchandiser buys grain from you and can’t move it to an end user right away, to protect their position once they purchase your grain they sell or “short” the market. Should prices deteriorate by the time they move it, the short position protects them. If prices move higher in the interim they have to put money into their hedge account until your grain is delivered. Let’s say you sold 5000 bushels of wheat to them last fall for $5.30 cash (July futures @ $6.50, less $1.20). To hedge their position, they “shorted” a July wheat contract. Today wheat trades for $10.50, which is $4.00 above where they hedged it, which means they have to have $20,000 sitting in their account until you deliver the grain or prices decline in the meantime. As well, the margin on that single contract is now $4,500 (started last fall at $1,200). So for your 5000 bushel contract the elevator has $24,500 tied up at this time. I don’t need to tell you how much money is sitting in margin accounts. The extreme volatility we’ve experienced in the wheat complex could possibly spill over into the corn and bean pits this summer. Your elevator
doesn’t want to participate in that. They’ve already got too much tied up in margin managing current accounts.

Knowing how to protect grain prices in this environment by using put options is an alternative to protect 2008 production. Option coverage out to 2009 will be very expensive. You’ll have to pay for too much time. Possibly somewhere in the future elevators may again offer cash pricing out into 2009. At this time more than ever, it’s important for you know how to use alternatives to protect grain values. Your lender needs to understand how options and futures hedging works so they can be “on board” with you should you need to initiate hedges to protect price. With input costs at all time highs, producers can little afford to not be able to lock in values and secure margins. Take time before spring arrives and examine your marketing knowledge and future goals
and targets. As always, have a marketing plan in place which secures your anticipated price goals. It’s never been more important that you know how to protect price and secure profit potential.