Art of Grain Merchandising

How to Originate Grain by Capitalizing on Delayed Payments

Posted by Chance Wood

May 23, 2017 7:55:00 AM

Now Later-1.jpgYear after year the most successful grain companies are those that execute a plan to acquire the majority of their ownership before harvest.  Likewise, the most successful farm marketing plans include selling grain when include locking in profitable prices before harvest for delivery at harvest or after.  So if it is advantageous for both parties to take action before harvest, why isn’t this commonplace? 

It all boils down to education.  We as originators/merchandisers need to help our farmers understand what their break even costs are and help them set reasonable and hopefully attainable profit goals; shifting the conversation from price per bushel to profit per acre. 

Taking a mutual and vested interest in your farmers’ operations ensures that the viability and strength of your business relationship will continue to grow with the success of both parties.  After all, we wouldn’t be here without the farmer.  

 

Let’s look at a few issues we run into when trying to originate grain:

A large number of farmers do not price their grain until after the first of the year for tax purposes.  Consequently, there is huge amount of opportunity being squandered by both the farmer and elevator.  When this occurs we’re losing on two fronts:

     1. The farmer isn’t pricing grain in their best interest when futures prices are highest before harvest. The best marketers are the ones who lock in a profit pre-harvest before cost go up after delivery. Every day grain goes unpriced there is a cost associated with those bushels.

     2. The elevator isn’t getting the most profitable harvest ownership they need. This isn’t value taken from the farmer; this is value that is extracted from the market by means of time value.

We need to understand that farmers should be selling when the market is telling them to; post-harvest, after the New Year is not that time.  Taxes are assessed when payment is received, not when the grain is priced.  So what about your farmers who price grain but delay payments until after the year?  Here’s where opportunity knocks in the form of the “Value of Money” (VM) benefit to the elevator. 

When farmers price grain and delay payments you have more funds that can be used to fund other cash flow needs until payment is made. This decreases the overall amount of money loaned, as a result you’re paying less in interest costs for as long as the payment is delayed.  The equation looks like this:

_________________       __________________       _________        _________
Current Cash Price   x   Annual Interest Rate   /   12 Months   =   VM/month

Let’s say your new crop corn basis is -.20z and December futures are at 3.85.  When the farmer delivers his cash price is $3.65.  Let’s call our annual interest rate 3.5%.  How does that pencil?

          $3.65                                3.5%                       12                    .01      
Current Cash Price   x   Annual Interest Rate   /   12 Months   =   VM/month

For every month the farmer delays payments there is a “Value of Money” worth .01/bu to the elevator.  This is money that you are not paying interest on a loan from the bank to fund this position.  This can be used to your advantage as an origination tool for the farmers who already delay payments.  We do not recommend that you encourage your farmers to delay payments if they do not generally do so.  Think of it this way; if your farmer is close to selling cash grain but needs a penny or two push in basis to make the sale, then you can use the “Value of Money” benefit as a bargaining chip. 

The benefits are clear:

- There is no direct cost to the elevator
- Farmer receives a small premium
- Farmer sells at the most opportune time for them
- The elevator acquires harvest ownership 

While this strategy can be harder to utilize in years with lower cash price commodities as farmers need more money for cash-flow purposes, it can be an effective and beneficial tool for both the elevator and the farmer.

This is just one tool that can be used alongside the many others explained in our Farm Marketing Essentials class.  Download our E-book “5 Best Practices of Grain Origination” and contact us for more information regarding the Farm Marketing Essentials class, the first installment of the Farm Marketing Specialist certification.

Note:  Different states have different laws regarding grain ownership, pricing, and payments.  Consult with your attorney to make sure you’re abiding by all regulations in your trade area.

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Topics: Grain Origination