A wise man once said, “People make life too complicated. And if you don’t uncomplicate it, you’ll never get anyplace.”
Don White said that. He was considered a mentor by many grain traders over the last 50+ years. It was his core principle, and it served him well. It also translated to success for many grain elevators.
At its core, the grain business is a simple service business. Grain elevators provide a service to customers: both producers of the grain and buyers/users of the grain. The elevator gets paid for that service through basis trading. The objective of basis trading is also simple — buy a low basis and sell a high basis.
Of course, we know that there is a lot more that goes along with running a grain business and accomplishing those goals. Simple does not mean easy!
Simple origination
At any grain elevator, the bulk of the margin comes from carrying grain bought at harvest for a period of time.
The reason goes back to the simplistic approach: harvest is the time of greatest need for the producer to have a place for their grain and is also the time of the lowest basis of the year.
Harvest is when a grain elevator’s service means the most to its producer customers. Grain handlers that understand this need are open late, don’t run out of space, have invested in unloading speed to keep lines down, and get their customers back to the fields quickly. Again — this is not easy! It takes a lot of hard work, investment and foresight.
The reward for all this hard work and service is the ability to own the basis at harvest time when it is low.
Successful grain businesses know that owning grain at harvest is the most significant determining factor in their overall margins each year. Those businesses work all year to buy grain on forward contracts for harvest delivery. They explain that it is in their interest to have firm price offers working at prices that lock in good profits for their operations.
Other grain businesses know that buying grain at harvest helps them, but even though that’s a simple thing, it isn’t easy. So, the grain handlers buy what they can across the scale during harvest (which may not be very much), and the rest goes to storage or a price later program. The elevators’ margins are worse, and the farmers’ costs rise on a crop they’ve already harvested.
Some grain businesses offer contracts that are not only complicated but don’t even allow them to own the basis. The complex also strains the long-term relationships with farmers they’ve cultivated, due to misunderstandings on the finer terms of a new type of contract.
Simple selling
The other goal for a grain elevator is to provide services to the buyers and end-users of the grain. Many grain merchants look at their buyers as competitors for most of the year. A few merchants understand these buyers are the company’s customers. This simple attitude shift can have a significant impact on the working relationship.
Buyers need consistent, dependable grain supplies delivered to them all year round. Grain elevators are in a unique position to be able to provide this service.
As a price neutral basis trader, when the prices aren’t high enough for producers to sell, and the buyers can get cheaper inputs, the elevator that can deliver is rewarded with a good basis. When the holidays, bad weather or logistical issues keep trucks or trains from showing up, the elevator that can fill the need, is given a good basis reward.
The selling side of the grain elevator business is simple. Consistently sell high basis throughout the year and provide the best customer service you can for your buyers. Achieving this involves understanding their business, knowing their needs and negotiating long-term basis sales that are in the top range of the basis curve and get you out of the spot market.
Typically, we derive success from a learned, repeatable process that creates value. In the grain business, that process is simply taking care of your customers on both sides of the bushel and capturing basis opportunities. Keep things simple in business and ensure certain decisions and practices align with these simple principles to define your success. It isn’t easy, but it’s worth it. ■
Jason Wheeler joined White Commercial Corp. in June 2005 to advise grain elevators across the country regarding their merchandising and risk management strategies. He is a graduate of the University of
Arkansas with a degree in Agricultural Business and has also taught many workshops all over the country to farmers, grain elevator staffs and lenders.
