The Co-op’s approach
Jeff pulls out the folder with last month’s financial worksheets and lays them on the table for Mike.
“Everything is well-documented; I don’t allow our folks to use guess-work,” says Jeff.
“We print and save all bidsheets at month-end for all markets and plug the values into a spreadsheet that adjusts for freight from our locations. This sets market value for our facilities.
We use published bids or actual month-end trades to establish all values. We can often sell at values well-above our buyers’ published bids (especially to ethanol plants), but we don’t know that for sure and don’t include that as a ‘hoped for’ gain,” he adds.
Jeff goes on to say, “we do not use ‘quick-ship’ premium bids to value inventory as it’s unlikely we could deliver any serious quantity.
We do not value inventory on premium rail markets for any quantity beyond for what we pay to secure rail freight,” he says. “Or we include a car cost if the rail market is clearly the best market.”
Jeff notes, “we price open sales at “FOB elevator, loaded-out” values. We price open purchases and inventories at appropriate discounts to those prices. This captures reserves for execution at shipping.“Some of our markets don’t publish bidsheets for documentation. We note those and make sure any values we establish are in line with surrounding markets,” he concludes.
This occasionally becomes an issue with “direct ship”purchases but the volume is small.
All option trades that correspond with farmer contracts are properly valued to match assets with obligations. All futures closed out gains & losses and Open Trade Equity is included to offset gains or losses in flat price on our inventory and contract positions.
“There’s more to it, but you get the picture,” says Jeff. “My objective as CFO is to provide a clear and accurate snapshot of our business at month-end as if we were selling the elevators. Lenders and boards of directors shouldn’t be given fantasy numbers. The only way to make sound business decisions is to know exactly what a change in the market has done, or will do, to your positions.
“That’s why I also run spreadsheets that can show me what changes in futures spreads, basis, or freight will do to our P&L. That part isn’t included in the financial reports but I always have it handy if you need it,” Jeff concludes.
Jeff recalled to Mike an article in Fortune from almost 40 years ago about how the bond firm Solomon Brothers marked inventories to market for daily trading P&L’s. A desk manager was asked how he kept his traders from assigning overly optimistic prices. The answer was simple: “From time to time, I pick an issue at random and tell the guy trading it to sell a million dollars worth at his assigned price. If he can’t, I fire him.” The problem these days isn’t with the practice of marking to market. It’s with how it has been abused in some sectors.