The Incredible Shrinking Margin

“I’m taking my soybeans down the road this year — their bid is a nickel higher than yours most days anymore, and their moisture discounts are better, too.”

Sound familiar? Managers always dread when farmers say they’re going elsewhere — whatever the reason. Sometimes a customer does leave because of price; that farmer is commonly known as a “transaction customer.” This customer typically has little loyalty and always has an eye for the better deal, and may come and go with the crop years. A “relationship customer,” on the other hand, may consider such “cruising” a waste of time and looks more at the big picture. He recognizes service and remembers when you stayed open late for his last load at harvest. Chasing transaction customers with higher bids or easier discounts may provide a small boost in volume but at the expense of overall revenue. Bidding up cuts your margin on all the other bushels you’d have bought anyway! It’s time for a reality check

Your handling costs rise with commodity prices: A ½% handling loss on soybeans costs 6 to 7¢/bushel. A 1% moisture discount on $6 corn costs 12¢/bushel at many processors. Soybean crushers discount moisture at 1.5% to 1.75% of contract price each ½%, figured to the 1/10%. That’s as much as a 23¢/bushel hit on 13.1% moisture soybeans at current prices.

Procedures or mistakes in grading inbound receipts can chew up revenue in a hurry. Some elevators may not discount a load of soybeans that test just over 13% moisture if that farmer’s other loads for the day were below 13%, for example. But a destination test on your outbound load might contain a spot of those 13+% soybeans that ding you for a hefty discount. Moisture discounts on corn are also costly this year — 15.6% corn could cost you 2% of contract price — that’s 14¢ on $7 corn.

This is the year to analyze your actual handling costs and reconsider how you set your bids and to be sure your staff is properly trained on grading procedures. That 10¢ per bushel “back to back” margin that worked in the past on soybeans seems woefully short in 2011. And 5¢/bushel on corn or 8¢ on wheat won’t go far. Basis appreciation and skillful “mix and blend” can help on the revenue side, but even those don’t guarantee a profitable year. Be realistic about your costs and set aside those fears of losing customers if you lower your bids a little. Now’s a good time to widen those margins; farmers are seeing record or near record prices, and their 2011 income is already high.

USDA monthly farm prices set record highs late in the 2010 crop, and August 2011 prices were 19 to 32% higher than the previous records set for harvesttime on corn and soybeans, and almost tied the highs on wheat. (Note: Monthly soybean prices topped $13 in the summer of 2008, but elevators typically were handling small quantities at that point)

Market volatility is another reason to widen margins and give yourself a bigger cushion. Futures price swings are big and fast these days. It’s easy to buy a few loads and lose 5 to 10¢ in soybeans in the brief time before you can get them hedged. (The theory that you’ll average out with some winners and some losers never seems to hold up in practice.) Even a small mistake on your Daily Position Report can be costly if not caught quickly when corn’s over $6. Markets can, and will, sell off of course, and it’s possible short-term price tops have been made. But matched with a 10% correction these days makes for a hefty swing. It’s prudent to assume high prices are here to stay — regardless of whether they go any higher — and to plan around high costs and volatility.