Why the Best Accountants in the Grain Business Think Like a Merchandiser

jeff2As the Controller, CFO or CPA responsible for producing financial statements for your company’s grain division, do you sometimes feel that you are talking a different language than those around you?  Are there times when others disagree with the numbers even though you know everything is correct?  Can you discern why the numbers look the way they do from a merchandising perspective?  Are you as confident as you would like to be discussing the financial statement with the owner, grain manager, Board of Directors or lender and in terms they understand? 

Don’t feel alone.  The truth is, the complexity of today’s grain businesses require you and your grain accounting team not only to be skilled in the practices of accounting, but to also have a detailed working knowledge of basis trading, spreads and market values-- concepts and practices never taught in your accounting classes.

Adding to this challenge is that every year presents a different set of circumstances that can vary the merchandising objectives.  The prevailing basis, spread and freight values, how the bushels are merchandised and the method of mark-to-market all have an impact on the company’s grain margins from year to year.  As the grain business gets more complex, the need to analyze and quantify these margins from both the accounting and merchandising perspectives becomes ever more important and is a job that quite often falls squarely on the accounting team’s shoulders.   Learn more…

Obtaining the numbers for the financial statement is the (somewhat) easy part.  Each number on the Balance Sheet is verifiable and as long as those numbers are accurate then the Profit and Loss statement should be too.  But, understanding and explaining the reason for the profit or loss in grain margins is a different story.  It takes a deeper insight into the merchandising side of the business which, in many ways, means being an accountant that can think like a merchandiser.

As the accountant, you’re looking at the business’s activities in the traditional way.  There is a total dollar amount of sales offset by a total cost of goods and, along with that, a futures brokerage account with trading activity that adds to the profit or loss.  The financial statement shows you the outcome of all the activity but it doesn’t really explain “why” the profit/loss is what it is.   Making sense of the numbers takes looking at the activities of the business from a merchandiser’s standpoint.

Here are a few ways you as the accountant can gain that perspective:

1)      First and foremost, if you’re involved in the accounting of any type of commercial grain elevator, processor, or reseller, start by developing a good understanding of the concept of BASIS and its significance to the overall grain trade.

2)      Get familiar with how basis and futures are being used in your company’s type of operations.  Are you an elevator generating margins from trading basis?  Are you an end user managing your cost of inputs?

3)      Be aware of how market values are being determined on outstanding inventory and contracts at the end of each accounting period.  Track them in terms of both price and basis.

4)      Be aware of how handling margins are represented in these values through the mark-to-market process and how they may have changed from the previous accounting period.

5)      Acquire an overall big picture view of the movement of basis in your area for the corresponding accounting period and know how your company’s merchandising practices align with it.

6)      Understand how spreads are managed in the trading of basis positions and the impact that has on the margins.   

7)      Be aware of if and how changes in freight values are reflected in the mark-to-market process.

Your added insight into the numbers can bring clear and valuable communication of the information to the organization and those making the key decisions regarding its future.

Topics: Mark-to-Market, CFO Insights