How Grain Buyers Create a Healthy Market for Farmers
Elevators, Feedlots, Ethanol plants, “End Users”… whatever you call them, grain buyers have one primary job: procuring grain! Let’s take a high-level look at how they help create a healthy grain market for Farmers’ grain. This will also boost our understanding of the dynamics within cash markets and strengthen relationships with your local buyer.
From a price perspective, we’ll focus on two primary methods of attracting grain from your Farm: Basis and “Over the Counter” cash-grain futures products like HTAs, accumulators, and average price contracts.
Basis:
Basis price fluctuation is an immediate lever that can influence when you sell you grain and where you deliver it. Essentially, basis is a buyer’s bid to the Farmer that varies from the national “board price” so that the buyer can feed/ crush/ ship the grain for another purpose and make a margin. It often comes down to transportation costs. For instance, when a local elevator buys your grain, they’re probably transporting that grain via truck, rail, barge, or ocean vessel to another grain buyer offering an even higher basis. If they buy you and your neighbor’s grain for +.10 and ship it to an End User offering +.30, they just made 20 cents (minus the cost of transportation) as a gross profit to their business. That’s generally how elevators make money.
We’ve all capitalized on stronger basis during weekly delivery specials, aka “Hot Bids” or volume incentives meant to help fill a large procurement order. That’s the polite way of saying a merchandiser is “filling a boat” to fulfill a sale they’ve made to another grain buyer. Conversely, when basis “dips” below levels we typically see, we can assume that an elevator’s need for grain is already met. In this case, the elevator is still willing to buy your grain, but at a relatively lower price than usual, because they’re already “filled up”.
We all exhibit these supply and demand habits in our everyday behavior. When our favorite team makes it to the playoffs, we’ll probably pay more for tickets than we usually might during a losing season. On the other hand, if your pantry is stocked up on staples, you’d probably only buy more of them if they’re on sale that week at the grocery store.
It’s also important to note that basis bids are relative to local markets. For instance, North Dakota Farmers may salivate at a -.30 Fall basis, but their fellow Mississippi Farmers might be used to +.50 in that same time period! We also see this variance in the type of buyer procuring your grain. Ethanol plants and Feedlots can have different seasonal needs according to demand that show themselves when we look at their typical basis fluctuation throughout the year.
In general (but certainly not in every case), basis tends to indicates the direction grain is headed. Negative basis levels indicate grain heading away from its origin to a final destination (a “push” factor), while a positive basis tends to indicate grain being drawn in (a “pull” factor). That negative basis in North Dakota has to account for the transportation costs of loading on a train headed to the Pacific Northwest and then onto an ocean vessel headed for China to feed their hog heard… quite the journey for a kernel of Corn! Likewise, Corn headed to a Mississippi hog operation needs to pay above the market price to account for transporting that grain so far from where it’s grown.
Those are all examples of how elevators adjust basis to manage their flow of grain. In some buyer-saturated river markets, that means that occasionally every elevator stays within pennies of each other to compete for grain. This can be favorable to Farmers, which we’ll call a “Farmer’s Market”. Elsewhere, like in certain areas of the Northern Grain Belt, Farmers have fewer delivery options and tend to be located further away from End Users, so buyers have to adjust basis prices to account for transportation costs. We call that a “Buyer’s Market”. That’s why Farmers up north tend to have more on-farm storage than those down south who live next-door to a feed mill… They need to manage their on-farm flow of grain to capitalize on higher basis levels outside of Harvest when supply is lower. You can see what those two markets look like here where green represents a relatively strong basis and a weaker basis in red:
(Figure: Comparing cash markets with many options in a small distance – the “Farmer’s Market”; and markets with only one, distant option – the “Buyer’s Market”.)
OTCs:
Unlike basis, “OTC” cash-grain futures products aren’t necessarily offered at every elevator. We tend to see fewer OTCs offered in “Buyer’s Markets” because the Farmer has limited delivery options, so the buyer can focus more on the basis costs associated with shipping grain to an End User. That leaves your sale options to spot-price cash sales, forward contracting, and hedging those positions separately in a brokerage account. When OTCs are offered in those markets, their fees are often more expensive than what Farmer-favored markets pay.
We can see a big difference over in “Farmer’s Markets” when searching OTC options at a commercial elevator on the Mississippi River. It’s like flipping through the phone book-sized menu at an old-fashioned diner… so many options for such low prices! When buyers have more local basis competition, they must differentiate by offering Farmers these attractive OTCs at reasonable prices to channel grain their way.
However, with modern ways of contracting your grain, Farmers don’t have to stick to the OTC options available at your local elevator. Nor do you have to fund a costly margin account, because your physical bushel delivery serves as collateral for your cash-based sales.
Farmer’s Keeper has the ability to introduce OTCs and professionally managed cash-grain programs independent of your locally available options, while still being able to deliver grain to your local elevator. Everyone gets what they want! That means Farmers living in buyer-favored markets have access to competitively priced OTCs, and all Farmers, regardless of their market, have access to their choice of several different managed program strategies/ program managers.