The process of Mark-to-Market accounting for Canadian grain elevators basically looks like this:
- Develop the routine of tracking data on the six essential reports:
- Choose from one of the three methods of valuation:
- Calculations and Journal Entries
This last part is easy with a simple routine, and the task is to come up with seven general journal entries:
- Valuation of Inventory
- Valuation of Open Purchase and Sales Contracts
- Recording of Daily Futures P&L Activity **
- Valuation of Futures Open Trade Equity
- Valuation of Price Later Contracts
- Recording of Daily FX P&L Activity **
- Valuation of FX Account Open Trade Equity
** Note, recording the daily activity may be done as the transactions occur throughout the month.
The need to protect grain positions from currency risk adds another step in trading the grain basis in Canada. When grain companies enter the US Futures markets or sell grain into the US they are exposed to currency risk. This currency risk is mitigated by trading CAD futures or trading deliverable or non-deliverable FX contracts. Either way, you will need some new general ledger entries to account for the financial activity.
Our goal in Mark-to-Market is to eliminate as much currency risk as possible and trade based on the changes in the basis in the grain markets. The currency hedging is in place to lock in basis values, if the value of the FX account goes up, the value of the grain inventory should be expected to go down. If the value of the FX account goes down, then the value of the grain inventory should go up.
Money can be made or lost in the currency account, the commodities account, and the physical grain. So it is important to look at all three pieces of the trade to determine its success.