Weighing the Market's Needs with Those of Your Business
The grain market is good at telling us what it wants - on a broad scale with spreads and more locally with basis.
Spreads and basis give any grain business a clear signal of how to maximize margins and/or avoid losses. Of course, it always will be necessary to balance what the market is asking for with what you need to do to keep your business operating.
Let's look at a few scenarios:
- Low harvest basis/big carries - This market is asking you to carry grain and indicates that not only will spreads more than compensate you for the cost of holding, basis is also likely to improve, too. The longer you carry, the bigger the margin - until the transition to new crop begins.
Shipping capacity, cash flow, and grain quality management mean that you can't wait for the maximum margin potential on every bushel, but if you can, plan to hold more profitable commodities longer and ship others earlier.
- High harvest basis/big carries - This scenario most likely indicates a large crop in general with a local shortfall in production. the market is good at bringing grain from areas of surplus to areas of deficit, so while spreads support carrying, it's likely that the basis will stay flat or drop as the season progresses.
The best-case scenario here often is to sell as early in the season as possible for both nearby and deferred delivery, while buyers are still looking to get coverage at high basis levels.
- High harvest basis/flat or inverted spreads - This market expects to have trouble getting what it needs and prioritizes getting it now instead of later.
Spreads will pay less than interest cost, and the long-term trend of the basis will be sideways and down. The best time to sell is usually much earlier in the season than usual for both nearby and deferred delivery - buyers afraid of not having coverage makes early basis stronger than it will be later.
If your business requires carrying grain all season, managing spreads to lock in acceptable carry ahead of time and having a good forward contracting program for grain are vital.