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Top 5 Mark-to-Market Grain Accounting Battles

Picture of Jeff Reardon Jeff Reardon Mar 10, 2015

CFO Insights

Top 5 Mark-to-Market Grain Accounting Battles

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The handling margin (back-to-back margin) is captured when the bushels are sold and delivered when grain companies value inventory and purchase contracts at the current buy basis. This leads to the most common fight with the grain merchandising team. Whether the margin is 5 cents or 35 cents, during years with a large inventory carryover the gross margins on the financial statement won’t match the number in the merchandiser’s head. Spend a minute to check last year’s inventory carryover verses this year’s and explain the timing of the income before the blood pressure spikes.

The most advantageous fiscal year end for primarily grain companies is immediately before the harvest of the largest crop for the area, not the most common date of December 31^st. Typically the end of the calendar year brings large inventory and grain payables to the balance sheet. This is the peak for both current assets and current liabilities which stress the financial ratios bankers, owners, and board members use to manage corporate finances. Before the financial ratios are presented show the value of price later bushels and the lower trend throughout the year.

Rail and barge freight can be volatile and need to be marked-to-market just like the bushels they transport. Contract values can move immediately with the volatile freight values and bring large gains and losses to contract values which can be offset by gains or losses in freight values.

Short crops can have a long – long tail due to timing. If your fiscal year doesn’t match you crop year, short crops will affect two years of financial statements as your grain inventories are built back up.

Trust the fundamentals of your basis math. Changes in basis create the gains and losses for basis traders; the cash price of a commodity does not affect the income statement of a basis trader in any way other than interest cost. When hedged properly the change in value for inventory and contracts are offset by the closed futures and open trade equity in the commodities account.

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