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Is Your Grain Merchandising Program an Activist or a Pacifist?

Is Your Grain Merchandising Program an Activist or a Pacifist?

Corn PileDespite just wrapping up an intense and at times nauseating, campaign season, I am not referring to politics here. Another way of phrasing this question would be do you merchandise your bushels, or does the market merchandise them for you? There exists, in the commercial grain trading world, a perspective of buying and selling grain that would be a stretch to call purposeful grain merchandising. This take on trading grain is very straightforward, and is not entirely wrong in its execution.

Take for example the corn market this fall. Going into harvest it was evident that overall more corn would be handled than in previous years. Passive minded elevators looked at this fact, then glanced at the structure of the futures market and, upon seeing the carry, made the decision to fill up with corn, sell only what had to be sold for the logistics of keeping the elevator open, and wait. Basis follows the spreads, so we’ll just sell later, and during big crop years the spreads tend to get wider at the roll, so we’ll wait on those, too. This line of reasoning is not without credibility, but this is what letting the market merchandise your grain looks like. This elevator will take whatever sell basis the market provides for whatever period the market provides at whatever roll spread the market provides. The only thing certain in this scenario is, ironically, uncertainty.

Now, the skilled basis trading merchant takes the very same market environment, with the same underlying truths, but applies an active, even proactive strategy for merchandising grain. Yes, basis does follow the spreads, so this carry represents basis appreciation over time, but from what level? In many areas of the country the basis has crept lower during harvest. So while we can be confident that the basis will strengthen, going forward what we don’t know is from what low it will rebound and to what degree it recovers. Going into harvest, some markets offered excellent values for post harvest, deferred time slot sales. These values have been sold by those with the skills to recognize their opportunity, and in some instances are no longer available. Will the basis return to those levels? Maybe, maybe not. The point here is that for the proactive merchandiser, this part of the margin is no longer variable to the whims of the market. While it seems to be that carry spreads typically get wider at the roll, this can be a distracting mindset to possess. Even now, corn futures spreads are paying well in excess of the cost of carry, some even over 200% of the cost of carry. The proactive basis trader will recognize this and take some, if not all, of this opportunity off the table now by implementing pre-spreads. Managing spreads is a very important aspect of successful grain merchandising; speculating on spread movement is not.

Upon exiting harvest, one elevator will be open to any volatility the market throws its way, be it basis or spread related. And one elevator will have secured its margins, regardless of what the basis or spreads decide to do, enabling it to be open for further opportunity when it arises.

So, while the features of this underlying market scenario are identical for both the activist and pacifist alike, their outcomes are likely to be significantly different. If you are interested in obtaining the skills necessary to take control of your merchandising program, check out our GMC offerings.

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