Consider two elevators (assume both could refill their space with soybeans or another commodity). Elevator 1 will keep the 2009 crop low-quality corn and blend it out with 2010 crop. Elevator 2 will move the corn out by spring 2010, take the discounts, and refill with soybeans, better corn, or perhaps with wheat.
Elevator 1 may make an expensive error by failing to include any merchandising return of handling soybeans through the same space the off-grade corn has to occupy for months. If merchandising both the soybeans and the corn would net more dollars on the space, move the bad corn, take the discounts, and use the space (and working capital) in other ways.
The point is, don’t get caught up in always trying to avoid discounts. In some cases, moving the corn out may not be possible. If there’s no market for a particularly poor lot of grain, you may have no choice but to hold it. But buy it right, and make sure you decide to hold it only after exploring all possible alternatives, and calculating the net dollar value of each.
Ethanol plants, exporters and feed markets are managing quality problems through more specific and tougher grade specifications, stiffer discount schedules, and careful testing of inbound corn. The end result is that corn trading is evolving into a two- or even three-tier market. Sellers that can guarantee #2 yellow corn may get one bid, high test weight corn may earn a premium, and problem corn may be discounted steeply, separate from specific grade discounts. Nutritionists are evaluating the impact of various grades and factors and are steering buyers’ decisions.
Sellers can manage this year’s challenges by being proactive. Some elevators are offering premiums to farmers for specific traits, such as 2008 crop corn, or for a specific higher test weight. Many have stepped up their oversight of operations, testing bins more frequently than usual, testing every outbound load before it leaves. Consider setting up a program to help farmers test bins. That serves two functions: 1) building good will, and 2) giving you an overview of the corn you’ll see in the months ahead.
And in grain trading, buyers have no reason to lock in a discount schedule on a contract unless the seller negotiates it. Grain contracts can be like credit lines. The only terms you can be sure of are the ones in your written, signed agreement.