2015 Grain Merchandising Outlook

Phil-1Each Spring, White Commercial's Phil Luce is interviewed by The Grain Journal to discuss his thoughts on the upcoming merchandising season. Below are his thoughts as seen in the most recent Grain Journal publication.

  • What is your outlook on the market for grains and oilseeds in 2015?

High prices and favorable weather did their job, which was to increase production. Demand remains strong but there appears to be more than enough product around to meet and exceed it. A larger carryover environment tends to coincide with lower volatility in prices, basis, and spreads. Relative to the last few years, that’s exactly what we’ve seen so far.

  • Given the market conditions, what steps should grain elevator managers take to keep their operations profitable in 2015?

I think situational awareness is the biggest factor. We have spent a few years getting used to an environment of scarcity, where basis pushes were easy to come by and if you waited long enough someone would always pay you whatever you needed.  In a market with excess bushels, it can be all too easy to carry ownership positions too long or create an unrealistic expectation of how high basis can get. The amplitude of basis movement tends to be smaller, farmers still own a lot of the bushels, and managers shouldn’t expect the same kinds of margins this year as were available in recent years. Make sure your margin goals match the current environment, not the results of previous years.

  • We’re coming away from some record crops in 2014. What effects will the carryover have on grain elevators, and what should managers do?

In general, bigger carryover means less volatility in the transition period between old and new crop. However, this can vary quite a bit from one area to another. In addition to the normal deficit areas outside the big grain growing states, heavy local concentration of users in some areas has created grain deficit pockets inside the corn belt. Whichever situation you are in, it’s going to be important to keep in mind that when there are excess bushels, even if they aren’t in your back yard, some basis number will get them to where they need to be.  The overall effect is that larger carryovers tend to create weaker basis in large supply areas, and put a cap on basis improvement in deficit areas. It’s very important in this environment to avoid getting into harvest time bidding wars.  Overpaying for a big crop is just about the worst thing that can happen to grain margins.

  • What are you hearing about the weather outlook for 2015, and what preparations should managers make?

Fear of weather exists at about a 1000:1 ratio with actual problems caused by weather. That’s not to downplay the adverse effects of weather; when they happen, it can be very bad indeed. It’s wise to pay attention but easy to get over focused on things like weather that are difficult to predict with precision and impossible to control. One good thing that comes from macro concerns about weather is the opportunity to lock in profitable prices for farmer customers and get ownership for the elevator. This is the time of year to work on getting firm offers from farmers.

  • The terrible transportation crunch of 2013-14 appears to have eased up somewhat but has not entirely disappeared. How should managers cope with the situation?

This is a problem with no apparent short-term solution, but there are some things that have helped mitigate parts of it for proactive managers.  Keep your buy basis at an appropriate level, maintain clear communication with producers and buyers, and initiate negotiations with buyers to reschedule deliveries when necessary. Facing the problem as early as possible has made the best of a tough situation. 

  • Is this a good year to be adding commercial storage or not? What are the market signs that indicate that you should add storage?

This decision has more to do with individual company and local market dynamics than market signs. The market that says “build storage” today can be saying something different in short order. Those who find themselves always shipping bushels during harvest at low margins should probably consider building space. Those who are constantly in a bidding war to get bins full should not. Here’s where the market signs come in. However much space you have, there are times when the market is telling you loud and clear not to use it; don’t use bins just because they are there.

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