Sep 5, 2013

A Strong Link in the Food Chain

On July 30, a very significant event occurred for Feed & Grain magazine and the American Farm Bureau Federation. While technically an acquisition of the former by the American Farm Bureau, I rather like to think of it as a marriage of two very strong brands that are deeply-rooted in the agriculture industry. While each in its own right is important to the agriculture community, both Feed & Grain and the American Farm Bureau Federation are strengthened because of the combination.

So, who is the American Farm Bureau Federation? We are the unified national voice of agriculture—6 million members strong—working to strengthen agriculture and rural America. Since 1919, our farmers have been leaders in shaping agriculture policy, providing economic opportunities for rural communities and weaving the very fabric that helped make this nation what it is today. In short, we are strong because of our farmers’ commitment to the nation, and especially the communities, in which they serve.

As millers, feed manufacturers and feed and grain handlers, you are a part of this special agricultural community along with farmers. Without one, there really can’t be another. Farm Bureau members are frequently your clients, on both the buying and selling ends.

As the people who store, handle and add value to our grain, you cannot do your jobs if farmers are not doing theirs. I see this chain as important, with everyone playing an equal part. Each of us stronger by the links we create. I’d like to put it to you this way: Do you consider the farmers who deliver grain to your operation, or who buy feed from you, as just more clients or as significant links in the chain? I’m hopeful that with our new partnership with Feed & Grain, you’ll begin viewing it as the latter if you don’t already.

With your partnership, today’s farmers are continuously improving, growing more food than ever before. Each year, a U.S. farmer feeds 154 people here and abroad. By 2050, the world population is expected to grow by 2.3 billion, meaning our farmers will have to grow about 70 percent more food than what is now being produced.

Feed and grains account for nearly two-thirds of what U.S. farmers grow. These commodities are significant to a growing world, but a farmer can only take them so far—typically from seed to your facility’s dump floor. What happens to them afterward is in your hands. This is where our partnership matters.

As Feed & Grain’s new owners, the American Farm Bureau is very aligned with your business. As times goes along, you might occasionally see on these pages some of our analysis of production agriculture and how it affects your sector. That is just one of the reasons we are optimistic that our synergies with Feed & Grain will only add another layer of expertise behind the industry resource you already love. We look forward to continuing to strengthen our link together in the food chain.

Jul 19, 2013

Spread Signals

Futures Trading 101 tell us a futures spread is the price difference between two futures contracts. A futures carry is when the deferred contract price is higher than the more nearby month. A futures inverse, or an inverted market, is when the nearby price is higher than a deferred price. Futures spreads can be bought or sold, and have a daily price limit equal to double the daily limit move of the underlying futures.

An important principle of futures spreads is that with storable commodities, there is a cap to how large of a futures carry the market will offer — a concept known as “financial full carry”, or FFC. FFC on grains is a function of the:

  • price of the more nearby contract,
  • the market interest rate, typically considered to be 3-month LIBOR + a small premium, often 2% (LIBOR + 2%),
  • days from when a futures contract can first be received via delivery until delivery begins on the deferred contract, and
  • the ‘per day’ storage rate as defined in the exchange’s rules.

Consider the December 2013/March 2014 corn spread: There are 91 days from Day 1 to Day 1 of the two contracts, LIBOR + 2% is about 2.27%, and the daily storage rate on corn is $.00165/bushel, or $.15 for 91 days. With Dec13 corn at $5, FFC on Dec/March is 17.88¢, the theoretical maximum March might trade above Dec13 futures. Dec13/March14 corn is trading at a 12¢ carry, equivalent to 67.1% of FFC.

Determining how close a spread might get to FFC is where "art" meets "science." Grain and soybean futures spreads in part reflect the market’s perception of available supplies relative to demand, over time. When supplies near delivery markets are readily available and basis is weak, a corn futures spread might trade to a high percentage of FFC — perhaps as high as 80% for Dec/March. In our example that would be 14.3¢.

But some years the dynamics turn on end — when demand outpaces supply and basis rises sharply. To reflect the need for supplies now rather than later, a futures spread could narrow or even invert. Corn and soybean basis hit record high levels in the summer of 2013, and in turn, July corn futures soared to a record inverse of $1.56 over September futures. This drives home the second principle of futures spreads:

  • there is no ceiling to inverses

The charts shown here tell the story of five crop years, showing the transition Sept/Dec spread as well as the harvest Dec/March spread.

  • The years shown include tight beginning stocks such as 1996 and 2013, as well as sizable stocks (’09).
  • The years also represent both slow starts to harvest as well as a fast pace such as in 2004 and 2007.
  • Each Sept/Dec chart shows the Sept 1 ‘carry-in’ corn stocks ratio, along with what percentage of corn harvested before October.
  • In the right hand column, the subsequent Dec/March corn spread is shown, along with the ending stocks ratio for the following summer ("carry-out").

Sept/Dec corn spreads pose unique challenges. Some crop years the ending stocks (new-crop’s "carry-in") are extraordinarily tight. This happened in 1996 and again in 2013. When the summer coffers are nearly depleted, the value of September corn futures can invert to substantial premiums over December futures, which are pricing the coming crop. But as September nears, traders must analyze how much new-crop corn will be available by mid-September to cover consumption, and how this will affect the Sept/Dec spread.

If harvest is early, the supply tightness could disappear before the end of September. This occurred in the fall of 2007 when almost 1/3 of the corn crop was harvested before October, and to a lesser degree in the fall of 2004 when 16% of the corn was cut early. In both years the Sept/Dec corn inverse melted away during July and August, and widened to a respectable 10+¢ carry as Sept became a true new-crop month. Last year the 2012 corn harvest was a record high 54% complete by September 30; it was clear even by August that enough corn would soon enter the pipeline that the Sept12/Dec12 corn spread reversed from a 30¢ inverse to a 6-10¢ carry in August.

But in 2009, although the corn carry-in was a hefty 13.9% only a 20-year record low 6% of the corn crop was cut before October. The Sept09/Dec09 corn spread was a generous 13¢ carry carry in June, but narrowed to only 5¢ by August.

The past does not guarantee what will occur in the future, and it’s risky to draw conclusions from a handful of crop years. But some broad points about Sept/Dec spreads deserve mention:

  • Sept corn futures are largely a new-crop month unless harvest comes slowly.
  • Late planting or a slow start to harvest may have more impact on Sept/Dec than the size of the beginning stocks.

This summer the corn pipeline is nearly depleted, and late planting raises fears of another slow start to harvest. Sept ’13 corn futures are trading more like an old-crop month, at nearly a 40¢ inverse to Dec futures in mid-July. But in the end, any commercial that wants to take delivery of September futures in order to get physical corn likely won’t receive it until late September. This feature of the delivery system is why it’s common – but not guaranteed - for Sept futures to lose most of any premium over December futures during September.

But a more important corn spread to most merchandisers is the December/March spread. Fall is when firms typically own the largest volume of corn, and managers need a generous Dec/March carry to cover the cost of holding hedged inventory. There’s a strong seasonality (well beyond the few years shown here) for this spread to trade to its highest carry during the fall. As a result, merchandisers often wait to roll short hedges forward until October or November. But that strategy isn’t fool-proof and caution is warranted!

In 1996 the record tight carry-in plus prospects for tight ending stocks again in 1997, ran head-long into a harvest that was 20% behind average in October. And Dec 1996 futures had fallen steadily from spring to below $2.70 by fall - after farmers had seen $5+ old-crop futures just four months earlier. Farm marketings were below average that fall, which also contributed to the Dec’96/March ’97 carry narrowing during harvest and inverting by First Notice Day.

Much has changed since 1996; over 200 ethanol plants dot the landscape, using 4-5 billion bushels of corn each year. Close to two billion bushels of on-farm storage has been built since then. But there are also eerie similarities. The corn pipeline is running dry again, planting was slow this spring and the odds for an early harvest look dim. With record high basis and futures inverses, new-crop cash corn is worth nearly $2.50 less than summer ’13 values, and new-crop contracting is minimal in most regions. Recharging the ‘pipeline’ will take time and buyers will be competing aggressively for early bushels.

The Dec13/March14 corn spread is currently a fairly generous 69% of Financial Full Carry. You might get a little more by waiting to set this carry (80% would = 14¼¢). But this spread is an important part of the return for holding corn, and good opportunities can vanish. Perhaps this bird in the hand is worth two in the bush.

Jul 17, 2013

Leadership Communication Skills: Listening and Being An Empathetic Leader

Colin Powell said, “Leadership is solving problems. The day soldiers stop bringing you their problems is the day you have stopped leading them. They have either lost confidence that you can help them or concluded that you do not care. Either case is a failure of leadership.” In his book, It Worked for me in Life and Leadership, Powell shares with us rules that he developed, concepts that he found effective, and stories of his life that impacted him and his leadership style.

Good leaders have several important characteristics, and while all deserve a discussion, we simply do not have the column space to discuss all of them with you at one time. In this month’s article, we want to focus on two that may often be overlooked or under-considered: listening and empathy. As a manager in a feed and grain business, you work with many different people including those that report to you, those that you report to, and those that neither report to you nor to which you report, but with whom you work and interact. Improving your listening and empathy skills will raise your status as an effective leader to all of these groups. Today, empathy and listening have been identified as two of the most critical leadership skills for successful leaders. Without well-practiced skills of these two characteristics, leaders are not likely to go as far as others who possess them.

Listening is a Skill

Communications skills include speaking, writing, reading, and listening. In academics, we quite often talk about developing good communications skills in our students, yet, we too, often neglect the listening skills. However, executive coach Marshall Goldsmith says that listening is the skill that separates the great leaders from the near-great leaders. So, what suggests that you are or are not a good listener? Based on the work of several researchers and other authors, below is both a description of a good listener and a not-so-good listener.

A good listener will exhibit the following actions and characteristics:

  • Good eye contact; eyes are fixed on the speaker; maintain eye contact
  • Does not interrupt but waits for the speaker to finish
  • Pays attention to the speaker’s non-verbal behavior, as well as verbal behavior
  • Exhibits empathy by working to understand the speaker; demonstrates a caring attitude
  • Summarizes what the speaker has said
  • Is open-minded and does not criticize
  • Provides constructive verbal and non-verbal feedback
  • Asks questions in response to a question

A not-so-good listener will exhibit these actions and characteristics instead:

  • Poor or little eye contact; eyes may wander and are not focused on the speaker
  • Interrupts the speaker; may change the subject
  • Is easily distracted, looks around, fidgets, is pre-occupied, takes phone calls, shuffles papers, does not pay attention to the speaker
  • Talks more than listens
  • May give little or no feedback
  • Is close-minded and judgmental
  • May give unwanted advice or starts giving advice before the speaker is finished
  • Downplays other’s emotions

Surely we have all been poor listeners at some point in time. Think about a time when you were trying to finish an important report and one of your staff popped in your office to talk to you about something. Did you put your report away and give all of your attention to your employee? Or, did you halfway listen while keeping your mind focused on your report? Everyone has times when they probably do not listen as well as they could and this is understandable. But, how you listen and behave much of the time will be the “label” given to you. Others may say that you are not really interested in what they have to say, or they may say that you have already made up your mind so it is not worth the effort to talk with you. If it is a bad time for you to focus on the person wanting to talk to you, then it is better to ask them to come back at a different time, maybe set an appointment. Then, at the time of the scheduled meeting it is important that you give this person all of your attention. This will put you in a much better light with your employee than seeing them now but not really paying attention to them. Poor listening skills can lead to poor relationships and poor performance, not something you want in your feed and grain business. Let your troops know that they can bring you their problems. And, when they do . . .actively listen to them.

Try Empathy – It Works

Being a good listener is necessary for being an empathetic leader: the second important leadership characteristic that we want to discuss this month. Many people confuse empathy with sympathy, but they are truly different. It is not surprising that empathy is important to leadership when you think of its origin. Empathy comes from the Greek term empatheia which means passion. How many times have you heard or said that you should have passion for your work and you should do something for which you are passionate? Empathy is recognizing and understanding the feelings, motives, and situations of others and being sensitive to these. Empathy is critical to great leadership because it helps you develop trust. When you use your empathic leader skills, it helps you understand why people react to situations, and you are more aware of others’ feelings and how their feelings impact their perceptions.

Are you now starting to get why empathy is important to being a leader in your business? In so much of what you do as managers, understanding the “why” is so important. We can much more appropriately respond to a situation if we truly understand the “why” and empathy helps us do this. Being empathic does not necessarily mean that we have to agree with the other person and/or their perception of a situation. It merely means that we recognize and appreciate the feelings of others and their view and perspective; we understand the needs of others and let them know that we do. Doing so can help you as a leader in several other ways. When you use empathy in your management, you help others feel safe with failures and errors because they feel that they will not simply be blamed; they feel that you will understand. When you understand your employees better, you are better able to help those who are struggling to improve their performance and you are better able to help those that excel stretch themselves to continue their own professional growth.

Empathy, while recognized as important is not always exhibited and encouraged in the workplace. Why? For one, expression of emotion in the workplace can still be regarded as a weakness. It is definitely a fine line to walk. Humans are complicated creatures and correctly understanding others and their perceptions can take time and be difficult. Expressing empathy also involves considering others before yourself, which in today’s extremely competitive business environment can certainly be challenging to do and one may wonder if putting others before self will really be a wise move. However, a survey of 2,405 managers and 2,595 non-managers conducted by the Institute of Leadership and Management found that respondent employees indicated greater levels of trust in CEOs for whom they believed exhibited greater levels of empathy. So, exhibiting empathy helps managers develop trust between them and their employees, and trust can also be a critical element to performance and business success.

Some Presidential Examples

Empathy can be potentially challenging to understand and utilize, especially if it does not come as naturally to you as perhaps some other skills. It is interesting to see examples of empathy and ratings of empathy in well-recognized leadership personalities, for example some of the Presidents of the United States. Author Colleen Shogan of the Congressional Research Service provides us some excellent examples and comparisons and contrasts of models of empathy used by Presidents Abraham Lincoln, Bill Clinton, and George W. Bush. Lincoln is considered to have possessed a high capacity for empathy and arguably his greatest use and impact of it came in his opinion and actions toward slavery. Lincoln also tried to understand the slave owners and understand their point of view. Lincoln also used empathy to stroke egos and gain political allies by using empathy to turn opponents into supporters, and he used empathy to identity persuasive emotional arguments. Lincoln is generally considered to have exhibited and used wise and appropriate levels of empathy.

Bill Clinton is often described as having great ability for making people believe that he understood how they felt. His expression of empathy in addressing questions during the 1992 presidential debate scored him significant points over George H.W. Bush because he made people believe that he understood them, their problems and their hardships; Bush did not. Clinton’s use of empathy helped him have foreign policy success in Northern Ireland, and helped him successfully address families and citizens after the 1995 Oklahoma City bombing. However, Clinton is generally not heralded as highly as Lincoln in his use of empathy because Clinton’s tears and other emotional gestures often made people uncomfortable and they have often been questioned as real or fake given his dishonesty in other aspects of his life.

George W. Bush’s presidential leadership is generally labeled strong and decisive more so than empathetic. Bush is often said to have missed or passed on opportunities to show a softer side of himself. To many this change in leadership style from Clinton was drastic. During his presidency, Bush dealt with the Sept. 11, 2001 terrorist attacks, Hurricane Katrina in 2005, and the flooding of the Midwest in 2008. Bush’s statements after Sept. 11 are considered to have exhibited toughness and strong presidential leadership rather than empathy; his actions and statements in response to Katrina caused his empathy approval rating to drop; however, his actions in response to the 2008 flooding and his statements in Cedar Rapids, IA show significant displays of empathy, suggesting that he recognized the importance of empathy and the criticisms received during Katrina.

Apply Them Yourself

It is not necessary for you to be an aspiring president of the United States usiness to make use of your listening and empathy skills! You do have to be conscious of and tuned into the situation though. We said before that being a good listener is necessary for being an empathetic leader. If you truly want to earn points with your employees and others, then pay attention to them, get to know them, take an interest in them. Listen to them when they talk to you.

Empathy in some regards can be viewed as kindness. In chapter five of his book, Powell talks about empathy and kindness. He provides a quote from a sermon he heard: “Always show more kindness than seems necessary, because the person receiving it needs it more than you will ever know.” Powell gives a wonderful example of the difference that kindness and empathy can make based on what he learned from talking to the employees in his office parking garage. This particular garage had to pack cars istacking them one behind another making a clear order to the exiting of cars at the end of the day: cars parked farther in could not leave until the lead cars did. Powell asked the attendants how they decided when the cars arrived in the morning who ended up getting parked so they were first, second and so on to get out. The attendants smiled and explained that if the driver spoke to them with something like “good morning” or “how are you” and smiled or something similar, then they were at the front to get out, but if a person dids not look at them or acknowledge their existence, then they were likely to be last or near last to get out. This is a great example of how just a little bit of kindness means more to the person receiving it than you might realize, and is also a great example of how a very costless act of kindness can make a big difference for not only the recipient but also to you as the provider, and to your business. Powell says, “Kindness is not a sign of weakness. It is a sign of confidence. If you have developed a reputation for kindness and consideration, then even the most unpleasant decisions will go down easier because everyone will understand why you are doing what you are doing. They will realize that your decision must be necessary, and is not arbitrary or without empathy.” There is that key word again — empathy.

There may be no more fun of a place to see genuine exhibitions of empathy than in the dugout of a 7- or 8-year-old boy's baseball team. As parents and coaches, we are leaders of our children and we generally hope that they are paying attention to what we say and to at least some of what we do. Watch what happens when your highest percentage hitter, the only kid who has not struck out all season, strikes out for the first time in the season during the second to last game of the season, and then he strikes out two more times in the same game. Every time, every kid in the dugout is there to greet him, pat him on the back, and show him that they know how he feels. If it were only that easy for us as leaders and managers to be genuine and to show others that we have an interest in them, in their state of mind and in their performance as it is for young boys on a baseball team, then maybe we would all perform better, be happier, and be “better” colleagues, co-workers, and bosses. And, maybe we too could come out at the final game of the season — the championship game — our next important meeting or interaction —and as an individual hit two homeruns, as a team hit four homeruns and have zero team members strike out, and get that big win! Just maybe….Listen, Empathize, Act. Try it. What do you have to lose? It could be the key to your improving your success as a leader!

Jun 10, 2013

The View From the Starship Enterprise

We can’t buy corn for anything these days,” Mark said to his scale operator, Larry. “If it’s tough in June, what will it be like by August? Is there any corn left out there?”

Merchandisers and managers across large parts of the country are struggling to buy old-crop corn and soybeans, despite record high basis values. Accumulating a train-load quantity seems a distant memory for many managers, and a few soybean crush plants are already shutting down until harvest due to tight soybean supplies and poor crush margins. But ethanol (futures) crush margins are at 17-month highs, and high enough to offset a corn basis of +70¢ or even higher. Buyers are ratcheting up corn basis to attract corn - but it’s still tough going. What lies ahead?

The March 1 Quarterly Grain Stocks report showed on-farm corn stocks of 2.7 billion bushels, down from 3.2 B last year. On-farm soybean stocks were 457M bushels versus 555M last year. There are stocks to be bought but farmers seem to be holding onto their remaining corn and soybeans as a safety net until the 2013 crops are planted.

Sooner or later farmer selling will increase, but even then there will be significant regional dislocations this summer. USDA said on May 10 that ending corn stocks will be 759M bushels, and pegged soybean stocks at 125M bushels. Both are barely at pipeline minimums, and this year there will be little new-crop corn available before September 1 to bridge the inventory gap. Near record-late corn planting in 2013 means it’s critical for traders to not only look at summer stocks, but to look at the distribution. Only two major states had more total corn on hand March 1 than a year ago (MN and ND), while key parts of the Western Corn Belt barely hold more corn than back in 1996!

The next challenge is to project what the ending Sept 1 corn stocks might be in various states. Ethanol plants now consume over 4.5B bushels of corn; that category was so small it wasn’t even a statistic back in 1996.

Table 1 also shows the approximate volume of corn needed per crop year if a state’s ethanol plants are all running at capacity, and assuming they produce 2.85 gallons per bushel of corn. The corn needed for March 1 through August is about 50% of the amount shown, or approximately 674M bushels for Iowa, or 230M bushels for Illinois. Iowa, South Dakota and Nebraska stand out as three problem areas for corn supplies: 60% or more of their March 1 stocks will be needed just for ethanol before Sept 1, 2013, with Kansas not far behind. And that doesn’t account for the corn needed for feed or other processing, as well as the pipeline inventory processing plants and feedmills/feedlots each need. In Nebraska, for example, ethanol plants would need to hold around 15M bushels of corn to cover 7 days’ grind; in Iowa that jumps to 26M bushels.

Iowa, Nebraska, Illinois, South Dakota and Wisconsin could see their lowest Sept 1 corn stocks since 1996 – a year when total usage was below 9 billion bushels!

But Minnesota and North Dakota, along with several other states outside the Corn Belt are set to hold a larger than usual proportion of the carryover corn this year. Other states that will fare better include Pennsylvania, Maryland and Virginia, along with the Midsouth/Delta – areas where 2012 production was not as hard hit, few ethanol plants exist, or where corn imports are already underway to boost inventories.

The uneven distribution of corn stocks is turning summer merchandising programs topsy-turvy. Ten states typically hold 82 to 90% of the September 1 carryover corn stocks: IA, IL, IN, MN, MO, NE, OH, SD, TX and WI. This summer they may hold as little as 60% and still have barely enough to get by. Corn will need to move ‘backwards’ into the W. Corn Belt this summer to ensure minimal stocks and to help cover usage. The highest basis values on corn, with a few exceptions such as the Texas Panhandle or California, are already in Iowa and Nebraska because of the ethanol plants!

One factor will ease the strain on corn supplies this summer: US corn exports are the lowest in decades. August and September weekly US corn exports used to run 30-45M bushels, but inspections haven’t even reached 30M bushels in a year. Cheap feed wheat along with the record US corn prices has made US corn uncompetitive into many world markets.

Early corn harvest in the Delta and Midsouth typically flows to the Gulf to be blended with dry, northern old-crop corn for export. But the late summer northern US corn will stay at home this year; there’ll be a big Southern corn crop coming out with nowhere to go. And this season more than half of the record Brazil corn crop will be second-crop ‘safrinha’ corn, coming out in mid/later summer 2013 to reduce demands for US corn.

Extreme dislocations and overall tightness does not guarantee that domestic corn basis will set new highs in late summer. Farm selling will pick up eventually and some end users/buyers will have already covered their needs or just shut down until harvest. Sellers should liquidate all basis ownership of both corn and soybeans before July/August in the face of the huge inverses in basis and futures.

Country merchandisers can still fare well in times of extremely high summer basis. Shorting the basis and shipping your existing Delayed Price inventory is one strategy for your arsenal. The objective is to sell the extreme strength and buy the basis later when farm selling picks up and basis is (hopefully) cheaper. This differs from shorting the high basis and hoping you can find corn or soybeans somewhere to fill the sale. That could turn into an expensive mistake.

Soybeans aren’t immune

Comparable problems exist in soybeans. Production fell the most in 2012 in IL, IA, KS, MO, and NE -- also areas of high crush rates. Ending soybean stocks will be at rock-bottom levels in most states. End users of soymeal, especially in these Western areas, need to lock in their remaining physical meal needs for late summer now. Owning soymeal futures won’t feed the cattle, and more crush plants will be taking prolonged downtime or running at less than capacity until harvest. The overall US soybean crush pace this summer has to slow by a record amount compared to the winter rates and that means much tighter soymeal supplies. The Southeast can import soybeans or even soymeal this summer, but the economics and logistics almost certainly make that unworkable for the Central and Western Corn Belt regions.

The transition to new-crop will be one for the record books as the US shifts from extreme shortages to potential record crops (Feed & Grain, April/May 2013). But first we have to get through the summer without the help of an early corn or soybean harvest. Atypical grain flows create opportunities as well as risk. Recall the Mission of the original Starship Enterprise: “To explore strange new worlds; to boldly go where no man has gone before.” Perhaps Iowa qualifies as a strange new world…..

May 6, 2013

How to Deal with the Aftermath of a Catastrophic Event

A grain dust explosion at a facility may be the most traumatic event a grain company will ever face. In the first hours after the explosion occurs, there needs to be a team in place to address all of the issues that literally will be coming at the company in rapid fire succession.

All of the following recommendations should be ready to be implemented even when the fires may still be burning. Some of these are common sense observations. Others may be issues a grain company has never considered.

1) Contact your insurance company immediately

When an explosion occurs, your first priority is the well-being of anyone injured in the accident. Then, while this may seem obvious, it is imperative that your insurance company be notified immediately of the event. While the grain company may never have encountered a tragedy such as this, the odds are that the insurance company has been confronted with previous large scale losses and a team of experts can be assembled in a relatively short period of time.

Remember, this is why you pay your insurance premiums. Your insured carrier most likely has worked with the following individuals/entities who can be retained and begin to put a plan of action in place:

  • Experienced firefighting companies which may be asked to consult with local fire departments regarding the best methods to deal with fighting the fire and the aftermath when the explosion scene may not be safe.
  • Legal counsel, who has experience in dealing with catastrophic events.
  • Experts in the industry who will be essential in attempting to determine the manner in which the event occurred. This group usually consists of industry explosion experts, origin and cause experts and experts in the engineering fields with disciplines in mechanical, electrical and process safety engineering.

2) Designation of media representative

When the event occurs, the potential is very real that representatives of the media will rapidly descend on the scene and want immediate answers regarding how the event occurred, the names and specific information of any of the injured, as well as a “history” of the grain company, particularly if the company has had to deal with safety issues in the past.

It is critical that a representative be selected who can deal with any and all of these media requests and that the individual have the ability to be “the face of the organization” during this tremendously difficult time.

3) Designation of investigative representative

Due to the magnitude of this type of event, it is almost inevitable that governmental agencies will conduct extensive investigations regarding the manner in which the explosion occurred. It is imperative that the grain company designate one extremely qualified representative who can coordinate and respond to all investigative inquiries to ensure that accurate and consistent information is ultimately provided to agencies such as OSHA and State Fire Marshal Representatives.

4) Coordination with your own independent counsel

In the aftermath of an explosion, it is not uncommon for the entities who are most involved to have “contrary opinions” as to whom, if anyone is responsible for the event. One way to begin to address this issue is for the grain company to retain its own independent counsel to protect the company, to provide advice regarding the myriad of issues that always surface with a large loss and to assist in the inevitable litigation that arises.

This is most critical in the initial days and weeks following the event. It is essential that a thorough investigation be conducted of the scene and this is the time when cooler heads need to prevail regarding the timing of the investigation. To be sure, the grain company and the company’s insurance carrier will be tremendously anxious to clean-up the scene and rebuild in order for the company to get back to the business of operating the facility.

Depending on the seriousness of the event, usually the governmental entities having public safety authority and responsibility will initially have jurisdiction and control of a scene. Often times it is after the governmental agency has “released” the scene when interested parties have their opportunity to inspect the site. “Interested parties” is defined as those entities whose legal rights or interest may be affected by the investigation of a specific incident, and it must be given the opportunity to inspect the scene. See National Fire Protection Association, NFPA 921, the Guide For Fire and Explosion Investigations.

Independent counsel may be able to assist in the overall coordination of matters to ensure that all interested parties are given the opportunity to conduct a full-scene examination before the site is substantially altered.

The coordination of a team of experts as outlined above is essential in dealing with the aftermath of a catastrophic event. Don’t wait until a tragedy strikes to begin to evaluate this process and to put a plan of action in place.

May 6, 2013

How to Utilize Data to Make Management Decisions

“Figures don’t lie, but liars do figure.”

“Lies, damned lies and statistics.”

Although the definitive source for the first quote is uncertain it has been attributed to several individuals including Carroll D. Wright and Mark Twain. Mark Twain popularized the second quote in the U.S. Anyone who has worked with data knows firsthand how you can come up with a different conclusion depending upon how the data is presented, understanding the first phrase very well. However, numbers and data have a very persuasive power and thus the relevance of the second quote.

Managing a feed or grain business takes lots of different skills. People and delegation management skills, customer relations skills, financial management skills, time management skills, and a myriad of others. One area that all managers deal with is utilizing data to make management decisions. It has been said that “what gets measured gets done,” and this is perhaps the key factor in why data analytics leads to a higher performance level by those organizations who religiously implement it. In this column, we will examine data from all angles and look at a number of the “hows and whys” of management using facts and figures.

What is data?

Data is (or “are” if you actually want to be grammatically correct — as the word data is the plural of datum) typically the results of measurements and can often be visualized using graphs or images. In fact, preparing a graph from many of the types of data we will discuss below is a great way to look at and visualize progress or to measure performance against a goal. There can be errors in data (we are all human) and anomalies in the tables/graphs can lead you to those errors, allowing you to get them corrected. In addition, presenting data in graphical form is a good way to share thoughts with your employees.

Data is necessary in making effective decisions and solving problems specifically because it has no “personal” agenda. Data is neutral — or as our quote at the beginning of this column suggests, “figures don’t lie.” However, remember the second phrase. As humans, we are the ones who hold differing opinions that often shape decisions which lead to differing results. Thus it is critical that all of the members of your feed and grain firm’s management team be able to read and correctly interpret the data you are using. This means familiarizing yourself with a few basic data terms and concepts such as mean (average), standard deviation, counts and benchmarking. This will ensure that your team members do not “find” something in the data that is not valid but simply supports their own personal views.

Definitions

Let’s define these terms briefly (several are from the area of statistics — did you know that 2013 is the International Year of Statistics?):

Mean (average): for a sample or population, the mean is the arithmetic average of all values; calculated as — adding up (summing) all the numbers you have and then dividing by how many numbers you have. Formula:

[Julie: ADD FORMULA HERE]

Where: [Julie: add glyph with a capital X with a line over the top here] = mean of all values in the data set

Σ x = sum of all data values

N = number of data items in sample

Example: data set of observations = 56, 62, 53, 55, 59, 57

n = 6; [Julie: add glyph with a capital X with a line over the top here] = (56+62+53+55+59+57)/6 = 342/6 = 57

Standard deviation: shows how much variation or dispersion exists from the mean (how spread out the numbers are). A low standard deviation indicates that your data points tend to be very close to the mean; high standard deviation indicates that your data points are spread out over a large range of values. Formula:

[Julie: ADD FORMULA HERE]

Where: σ = standard deviation

Σ = sum of

X = each value in the data set

[Julie: add glyph with a capital X with a line over the top here] = mean of all values in the data set

N = number of values in the data set

Example: Using the data from our average example above

[Julie: Add in four lines of equations here]

This is interpreted as follows: a bit more than 68 percent of our data falls within one standard deviation above and below our mean (in a statistical sense, 1 standard deviation either side of a mean encompasses 68 percent of your values). Three quick graphs illustrate our point:

Figure 1 shows observations with a small standard deviation, and Figure 2 shows numbers with a large standard deviation.

Figure 1. Figure 2.

[Julie: ADD GRAPHICS 1 & 2 HERE]

Source: www.statsmakemecry.com

Figure 3 below shows a “normal distribution,” sometimes called a bell curve for the shape of the graph. There are many cases where your data will tend to be around a central value with no bias to the left or right.

Figure 3.

[Julie: ADD GRAPHIC 3 HERE]

Source: http://www.faculty.virginia.edu/PullenLab/WJIIIDRBModule/WJIIIDRBModule7.html

Counts: the number of observations or times of an occurrence

Benchmarking: setting standards or goals, and measuring your firm’s performance against either these predetermined numbers, numbers from similar firms in the feed and grain industry (perhaps from your state feed and grain association) or your company’s historical performance.

What kind of data?

Financial data

Financial information is the first area we will look at. This information comes from your financial statements — primarily your firm’s income statement and balance sheet. We will discuss a number of these below (using a hypothetical firm Forrestville Feed and Grain) — how to calculate them and their importance.

Liquidity Ratios: these are ratios calculated from your balance sheet and measure the liquidity of your company (your ability to meet short and long-term debt obligations)

Current ratio: A test of the liquidity of your grain and feed business — can you meet your debt obligations if you liquidated your current assets?

Formula:Total current assets/Total current liabilities

Example: $5,691,714/3,769,347 = 1.51

Forrestville Feed and Grain has $1.51 of current assets to meet each $1.00 of its current liabilities.

Quick ratio: Some people call this the “acid test” of liquidity for a company, as it eliminates inventory from the calculation. Thus, it measures perhaps a more true “working capital” relationship of cash, accounts receivable, any prepaid expenses and notes receivable to meet your current obligations.

Formula: Total Quick Assets/Total Current Liabilities (where “Quick” Assets = Total Current Assets — Inventory)

Example: Quick Assets = $5,691,714 – 1,278,910 = 4412804/3,769,347

Quick Ratio = 4,412,804/3,769,347 = 0.117

Forrestville Feed and Grain has $0.117 of quick assets to meet each $1.00 of its current liabilities. In this case the business only has 11.7 cents to meet every dollar of current liabilities. The Forrestville example is a good example of why it is important to consider more than just one ratio. While the current ratio was looking strong, the additional calculation of the quick ratio revealed a less optimistic scenario. This business has a lot of inventory as part of its current assets. If management is confident that the inventory can be quickly turned into cash then there may be no need to worry about a quick ratio of .117. However, if market conditions are such that the inventory is not very liquid then further attention may be needed.

Debt to Equity ratio: This measure looks at how your firm is leveraging the debt you are carrying against the capital employed by your company’s owners.

Formula: Total Liabilities/Owner’s Equity (sometimes called “net worth”)

Example: 5,130,213/8,208,340 = .625

Forrestville Feed and Grain has $.625 of debt for every $1.00 it has in equity. Lower values of this measure are favorable – indicating less risk to the business. A debt-to-equity ratio of 1.00 means that half of the assets of your business are financed by debt and half by shareholder’s equity. A value higher than 1.00 means that your assets are financed more by your creditors than the owners of the firm.

Efficiency ratios — help you to measure the company’s efficiency of turning/utilizing your inventory, sales, assets.

Days sales outstanding: this ratio shows both the average time it takes to turn your receivables (what people owe you) into cash and the age (in terms of days) of a company’s accounts receivables. Basically, it will tell you how effectively you collect the money your customers owe you.

Formula: (Total Accounts Receivable/Total Credit Sales) x 365

Total Accounts Receivable (from your balance sheet) = $227,912

Total Credit Sales (from your income statement) = 1,823,296

Number of days in the period = 1 year = 365 days (some people use 360)

DSO = ($227,912/1,823,296) x 365 = 45.63 days

Forrestville Feed and Grain takes approximately 46 days to convert their accounts receivables into cash. This can then be compared to their terms of “Net 30 days” – a common credit term that tells customers their accounts are due in 30 days – before Forrestville starts charging interest on a customer’s account. This means that their average customer takes 16 days beyond the stated terms to pay.

Inventory Turnover Ratio: this calculation measures how quickly you are able to move (or turn) your merchandise (inventory).

Formula: Net Sales/Inventory

Example: Net Sales = $9,563,178 (from Income statement)

Inventory = $2,034,718 (from Balance sheet)

9,563,178/2,034,718 = 4.7 times

Forrestville Feed and Grain is able to rotate its inventory 4.7 times each year.

Profitability ratios – show how successful your company is in generating returns or profits on the investment that has been made in the business.

Return on Sales (or profit margin) = (Net Profit/Net Sales) x 100

Formula: (Net Profit/Net Sales) x 100

Net Profit = $765,351 (from your Income statement)

Net Sales = $9,563,178 (from Income statement)

Return on Sales = (765,351/9,563,178) x 100 = 8.00

Forrestville Feed and Grain has an 8 percent profit margin.

Return on Equity or Net Worth: This calculation measures your firm’s ability to generate returns on the capital invested by the owners of your company.

Formula: (Net Profit/Net Worth) x 100

Net Profit = $765,351 (from your Income statement)

Net Worth = $8,208,340 (from your Balance sheet)

Return on equity = ($765,351/$8,208,340) x 100 = 9.32%

Forrestville Feed and Grain generates a 9.32 percent return on the capital invested by its owners.

One Internet source you might find useful to compare/contrast some of the above financial metrics is the following website:

http://www.creditguru.com/ratios/inr.htm

Productivity/efficiency data

Your feed and grain business generates lots of data which you can utilize to measure the efficiency of your business. Measurements here include how efficiently your firm is using its assets — think things like number of tons of feed manufactured/hour or bushels of wheat delivered/truck. In fact many of these types of metrics can be developed strictly for your own use — you can be creative and almost any asset or resource can be used as the basis for a measurement. The focus should be on — is it something you can track and measure; and then, can you utilize this data to improve the efficiency of your business? Ratios are great ways to look at these sort of things, as ratios typically measure something like:

Output/unit of input

Where the output is something related to your business volume or sales and your input is some sort of effort or asset. When set up in this manner, ideally you want the numerator (top number in our fraction) to increase and the denominator (bottom number in our fraction) to decrease. Or — combinations thereof — meaning you want output to increase while keeping input the same. Both instances generate a positive result — the ratio increases — indicating increased efficiency!

Feed Mill Measures

Let’s look at a couple that are commonly used in the feed business (source of several of these measures is “Feed Mill Key Performance Indicators,” by Charles Stark from North Carolina State University.
ee: http://www.ncsu.edu/project/feedmill/pdf/E_12-CALS-885%20KPI%20FM_003W.pdf).

Tons/run: Number of tons of feed/run. A feed mill that manufactures only mash feed should measure the tons per mash run, and one that pellets feed should track tons/pellet mill run. A higher number of tons per run indicates that your feed mill minimizes the number of times you switch to a different feed type — which will increase the tons of finished feed you produce.

Actual versus scheduled time: This measure is the number of hours your feed mill is operated each week compared to the scheduled time. You can calculate “Scheduled time” by multiplying the number of shifts per week by the hours per shift. If your mill is working more than the scheduled number of hours – then you can take a look at what caused the extra hours. Contributing factors might be feeds which are difficult to pellet due to formulation, lack of ingredients, equipment breakdowns, delivery problems or low employee productivity.

Downtime hours: This piece of data measures the time each week your feed mill is not manufacturing feed. Downtime may occur due to planned maintenance, but often downtime is unscheduled and due to breakdowns, lack of ingredients or full load-out bins waiting for delivery trucks. Analysis can then focus on how to reduce downtime and its causes.

Number of tons of feed manufactured/hour (or day or month): provides a measure of your productive capacity. When you start tracking this, you can see what your average is, and look to ways to increase this measure and what the bottlenecks are.

Number of tons of feed manufactured/employee: this calculation indicates how efficient your labor is in producing finished product.

Grain Elevator Measures

Number of bushels throughput/month (or year): this may be more a measure of size than efficiency. However, similar to the measure of feed production above – tracking this will give you a feel for what the norm is for your business and allow you to look for more efficient ways to handle grain.

Number of bushels throughput/bushels of storage: a measure of how many times you “turn” your facility. This will obviously depend on your location in the grain trade – as some elevators are used more for grain storage (country operations) and some are used more for throughput (terminal elevators or unit train operations). However, the point is to set some benchmarks for your facility and track them over time. This allows you to set standards against which monthly or annual performance can be measured.

Market data

Market data can be analyzed to determine how well your firm is doing relative to competitors in your marketplace and what is happening over time to your customer base.

Market share: Generally this is not a difficult calculation to make, and it is useful to track it over time. In the feed business, you can estimate this by livestock specie type — taking dairy, cattle or hog numbers, etc. from the USDA Census of Agriculture and then calculate how many of those animals you are feeding based on the feed tonnage you sell. Those in the grain business can do a similar calculation by looking at planted or harvested acres of crops in the counties you serve (generally published by your state department of agriculture in their annual statistical summary), then multiplying by average yields, and then calculating the number of bushels of those crops you handle each year.

You will likely need to make some assumptions, as market areas in the case of both feed and grain firms generally do not follow county lines; however, you will typically know the reach that your firm has.

Customer profiles: This sort of data is useful to track, so as to look at your customer base. Measures to follow might include: average acreage farmed (for grain operations), average head of livestock (for feed mills), average age, or distance from your place of business. It is also sometimes helpful to separate this type of data into categories such as top third, middle third and bottom third as this can shed light on where your business is coming from. Another categorization that is useful to track here is the 80/20 rule — the adage that for many businesses 80% of their business (or close to it) comes from 20 percent of their customers. Looking at the characteristics of the customers that provide 80 percent of your business can be a very instructive exercise — as you need to know what is happening to those people and continue to track their desires and plans.

Good Data, Bad Data, Too Much Data, Not Enough Data?

What data you collect, how often you collect it and how you utilize it to manage your feed and grain business is your choice. Some data is very useful to have (good data), other data is just that — “data,” and may not help you manage your firm efficiently. Sometimes we even get bad data (data can be poorly collected, or in some cases the variables are not relevant for your business at this point in time) — in which case you may make a decision that turns out to be incorrect. Other times we find ourselves overwhelmed with too much data — though more typically we find ourselves looking for or wishing for more data in order to make a better or more informed decision.

A commonly used idea in business management is the idea of moving from data to information to knowledge to wisdom. With recent technological changes in computing and electronic communication we find ourselves with increasing amounts of data, but that data is in its raw form. As a manager you must first ensure the data is transformed into information. You can do this by setting up systems to regularly produce tables and graphs as well as generate key summary statistics and ratios. Next you and the rest of your management team need to turn this information into knowledge. This is not a one-time event, but rather you need to be doing this regularly. A key component of doing this regularly is that you will be evaluating trends in your business — which is critical to good decision making. Over time, as you are more and more comfortable with the information it will have an increasing important impact on your decisions and you will be at the wisdom stage. Good luck in becoming a wise manager!

Mar 20, 2013

Beyond the Scale

Operations management software can deliver benefits that go far beyond the scale to not only improve the grain handling operations themselves but also streamline back-office functions and improve customer service – from faster weighing processes and traffic flow to speeding up invoicing to improving accuracy and communications.

At a grain handling facility, generating a scale ticket is the first step in managing the operations for inbound and outbound shipments. Operations management software with capabilities such as quick lists and RFID technology (which automatically retrieves customer information and records ID and weight information) mean less manual data entry and searching for information, which, in turn, improves accuracy and decreases wait times for haulers. Quick and easy ticket generation is just the tip of the iceberg when it comes to what operations management software can do for an agribusiness. With system integration and automation tools, the ticket information can go beyond the scale to improve efficiency, accuracy, and service from the scale to the bin to the office to the customer.

With a message board interface, the ticket information can display on an outdoor electronic display so that the hauler immediately can see and validate the information. Plus, the display board can convey instructions to the hauler as to which pit to proceed to, keeping traffic flowing and ensuring accuracy as to where the grain is dumped. At the pit, load information such as the vehicle ID, commodity, and grade can be automatically transmitted to a monitor in the receiving area to further ensure accuracy and make communication at the pit much easier versus trying to decipher handwriting or static-filled radio communications. System integration capabilities also allow for the ticket information to automatically update a binning system to ensure the grain is routed to the correct bin, as well as update the back-office accounting system so that statements are accurate and timely. Using an online account access tool for your customers, the ticket information can be available to your customers 24/7 so they can review the information at their convenience. System capabilities that allow for being able to automatically email tickets to your customers also help make you a great service provider in their eyes. In today’s age of instant communication, your customers expect that level of service, and automation tools and integration can help ensure you provide the level of service your customers appreciate.

Have you reviewed your grain handling processes lately to see how efficient they are? Are your scale house and office processes contributing to better customer service or are they hindering it? Are you maximizing system integration capabilities and automation to take full advantage of the benefits they can provide? Operations management software and automation tools are easy to fit into all kinds of facility layouts. Working with a software provider to review facility layout, traffic flow, and processes can bring best practices to your agribusiness and help you determine how automation can work for you. Whether you are ready for incremental automation or becoming fully automated, even small changes can make a big impact in improving efficiency, accuracy, communications, and service.

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Steve Day is Senior Product Manager for the oneWeigh Scale Automation System with Cultura Technologies Inc. For the last 15 years he has been dedicated to helping agribusinesses improve their shipping and receiving operations with practical, easy-to-use tools.

Mar 11, 2013

Warning: Grain Tsunami Incoming

Grain merchandising is a never-ending series of challenges, and 2012 crop has been that in spades. Drought-decimated corn and soybean crops left elevators with less grain to handle and less revenue. Buyers and sellers alike have had to adapt to record high basis levels on corn and soybeans, tight holding by farmers, and volatile futures spreads. At least wheat offered some reasonable revenue opportunities!

Even bigger challenges lie ahead. September 1 combined stocks of corn, soybeans, and wheat this year are projected to be around 1.45B bushels, the lowest since 1997, and compared to 1.9B bushels in 2012. (This uses USDA’s 9/1 forecast carryout on corn and soybeans. Wheat stocks are estimated from USDA June 1 wheat carryover plus estimated production minus estimated June/July/Aug disappearance.)

By late August 2013, the wind will be whistling through bins across the country. Around 88% of U.S. storage space will be empty, the pipeline of corn and soybeans will be nearly depleted, and imports from South America may be the story. Summer basis swings on corn and soybeans could be dramatic and violent, with atypical grain flows to redistribute supplies. The BNSF railroad, for example, has reduced rates for soft red wheat from the eastern Corn Belt to Texas feedlot areas and to the Pacific Northwest export terminals. But the lack of corn and soybeans can become bearish on the basis in some areas; there’s no reason to bid up if you can’t originate enough inventory to run your ethanol or soybean crush plant.

Some export facilities may sit nearly idle by late summer (except for wheat); U.S. soybean export shipments were already at a record 85% of the crop year projection by March 1 and total sales were at 95+% — with 6 months until harvest. Tight corn and soybean stocks mean exports can’t climb much in any case, until 2013 crop hits the bins.

But a dramatic turnaround lies ahead and sharp grain traders will use idle time wisely this summer. In February, the USDA Economic Outlook forum in Washington, D.C., offered optimistic scenarios of soaring production and sharply higher ending stocks in 2014 on corn and soybeans, along with slightly lower wheat production and stocks.

  • Corn: 96.5M planted acres @ 163.6 bpa for a crop of 14.53 billion bushels. Ending stocks in 2014 at nearly 2.2 billion bushels
  • Soybeans: 77.5M planted acres @ 44.5 bpa for a crop of 3.405 billion bushels. Ending stocks projected at 250M bushels
  • Wheat: 56M acres @ 45.2 bpa for a crop of 2.1 billion bushels; 2014 ending stocks at 639M bushels, the lowest since 2007/08.
  • Corn + soybean production: 17.94B

At this point there’s no reason to doubt USDA’s general premise, although a repeat of last season’s heat and drought could change things quickly and dramatically. Here is an alternate Grain Service Corporation (GSC) scenario for '13 production:

  • Corn: 98M acres @ 155 yield = 13.9B bu. (record)
  • Sbns: 77M acres @ 43 bpa = 3.3B bu. (near-record)
  • Wheat: 56M acres, and 2.2B bu. production

USDA assumed corn acres down .7%, and soybean acres up .3%, largely based on the soybean/corn price ratio. But feedback from GSC clients and many other surveys point to higher corn acres this year; we used 98M for this scenario. Our yields assume a significant recovery from the drought, but are below USDA’s figures and below prior records. Our wheat scenario uses USDA’s acreage but a slightly higher total crop.

Even using GSC’s somewhat more conservative production scenario, inventories this fall could reach 20 billion bushels, despite the depleted Sept 1 stocks, as potential record corn and soybean crops pour into elevators. This would be nearly 3B bushels higher than last year and close to the record 20.5 billion bushels set in the fall of ’09. USDA’s Outlook Forum projections on corn and soybean production are 740M bushels higher than used in Chart 1 and Table 1, which would only add to the challenges. (Note: All production and stocks figures exclude sorghum, oats, barley, and other crops.)

TABLE 1 & CHART 1 HERE

Navigating the 180° transition from '12 crop to '13 crop will be difficult, but reality will be more complex than simple numbers. The Sept 1 totals in Chart 1 and Table 1 assume corn and soybean harvest is complete, when it’s really barely underway. And daily consumption also serves to free up space. Total bin space is higher now than in 2009; USDA statistics indicate around ¾ of a billion bushels of space have been built in 2010 through the end of 2012, plus more this year. Regional variations also become a factor, in carry-over stocks as well as production. Southern and Eastern states will hold a larger percentage than usual of carryover stocks this year, and these areas are no longer in drought, improving their production prospects. The Western Corn Belt remains the greatest concern, with the double whammy of minimal carryover stocks and ongoing severe drought.

Overall, the reversal to a tsunami of grain carries implications of cheap basis and wide carries across corn, soybeans, and wheat. But those empty bins in early September and the depleted pipeline will take time to replenish, and steep basis premiums are likely for the early bushels — premiums that can often roll forward. Plan for cheap basis this fall, but be careful about shorting basis for early slots.

As ’12 crop basis trading opportunities dwindle along with grain stocks, use that ‘spare time’ to prepare for the fall harvest.

  • Review credit lines and financing needs with your lender.
  • Project potential grain receipts against available space.
  • Consider booking fall freight early to ensure cars and fix your cost.
  • Monitor new-crop futures carries

Financing may become a bigger issue again. Overall, crop values may not be much higher than last year — if at all — but merchandisers will likely be carrying more owned-inventory and for longer periods this harvest. Table 2 uses production X USDA’s average farm price as a broad measure for the value of the crops. This won’t determine individual financing needs, but it’s a starting point for discussions with lenders.

TABLE 2 HERE

A problem that’s anticipated is often a problem that’s averted, and by summer much of the furor in old-crop basis may have subsided. Imported corn and new-crop U.S. wheat will serve to stretch feed supplies in some regions, and soybean and perhaps some meal imports will also buffer the transition. Even with unusual stop-gap measures, the merchandising and logistics transition will still be dramatic as the 2013 harvest rolls into town and last year’s shortfalls turn into a tsunami of grain.

Mar 8, 2013

Motivating Employees: Carrots Beyond Salary and Benefits

Almost all managers have heard (and likely used) of both carrots (rewards and recognition) and sticks (punishments or censures) as methods to work with your employees. In this column we draw on a recent book entitled, The Carrot Principle, by Adrian Gostick and Chester Elton who base their recommendations on a 10 year study of 200,000 managers and employees — where they state that top managers (as measured by performance of their firms on Return on Equity, Return on Assets and Operating Margin) rely more heavily on the use of recognition to engage their people, retain talent and accelerate performance. Their data and suggestions are convincing, and below we highlight some of their findings and add some of our thoughts on possible applications in your grain elevator or feed mill. Their book is well worth reading and we find the lessons are applicable to both large and small businesses.

Almost, closer, nearer

Gostick and Elton start out by stating that a manager who sets clear goals, communicates openly, respects people and creates trusting relationships — almost has it right. They further posit that a firm where people are coming to work on time, doing their job and feel satisfied — is close to achieving its full potential. Finally, they talk about management theories which promise to transform your business from ordinary to extraordinary, which will push you nearer to your goals than ever before. But — they argue that “almost there” is a frustrating place to be — and that you need what they term an “accelerator,” and that this accelerator is purpose-based recognition.

The authors quote a statistic that 79% of employees who quit their jobs cite a lack of appreciation as a key reason for leaving. Their solution to this issue and a better strategy to motivate and retain employees is to use "carrots," which they define as something used to inspire and motivate your workforce. Their comprehensive research shows that when employees know that their strengths and potential will be praised and recognized — they are significantly more likely to produce results.

Survey says...

Gostick and Elton cite a study first conducted by Lawrence Lindahl in 1949 — who researched human behavior at work — and which has been replicated several times since. In these surveys, managers were asked to name what they thought employees wanted and then this was contrasted with a similar list prepared by employees. Every time, managers guessed that good wages and job security would top employee lists, but their people always cited “feeling appreciated” and “informed.”

They go on to write about a Watson Wyatt Reward Plan survey of 614 employers who employed 3.5 million employees. This study found that the average turnover rate of employers with a clear reward strategy was 13% lower than that of organizations without one!

Leadership is key

Gostick and Elton discuss leadership quite a bit. They offer some interesting insights, and outline what they call the “Basic Four” areas of leadership. They cite their 200,000 person study, and report that it confirms that managers who achieve enhanced business results are significantly more likely to be seen by their employees as strong in: goal setting, communication, trust and accountability. We will not discuss all of these areas, but there are some nuggets of wisdom we will pass on.

Communication within your feed and grain company is going to happen with or without your active participation as an owner or manager. Employees are talking about customers, processes, rules, office romances — everything — and all the time. So if you fail to constantly and openly communicate about what your firm is and what is important — the conversation does not stop, you just aren’t a participant, much less leading it. Thus, you need to communicate regularly and openly to keep things on track. Do this in-person, via e-mails, with company newsletters and via mid-level managers.

The authors state that a good place for managers to start the process of building trust is by becoming more visible to employees. Getting out of the office and mingling with employees is a simple solution to a very common trust problem. One of our favorite quotes from the book is this: “The things that keep us in our offices are nowhere as important as open communications with employees.” We’re sure many owners and managers in the grain and feed business practice this strategy — but it can certainly be improved. Making a commitment to spending an hour or two each week talking to your truck drivers, feed grinders and grain receiving personnel can pay big dividends. Talking to them on their turf — in their area of operations — allows you to not only show interest, but see things from their perspective.

Perhaps a workable approach here would be to make a list of 20 to 30 questions, and go through them (a couple at a time) each time you visit their work area. Questions can focus on their physical job, or can be more probing regarding their relationship with you and your business. Example questions might be:
1.) Are there any problems or bottlenecks that are causing issues for you?
2.) Who is your favorite customer to deal with and why?
3.) If you were the boss, what changes would you make in your area?
4.) Is there a product or service which you think our business would benefit from carrying or offering?
5.) Why do you like working here? And, don’t forget that these employees can be a key source of insight on customers and competition, and may well have these insights long before they hit your radar.

The building blocks of recognition

In their book, the authors outline four of the most common forms of recognition, which they say “make up the backbone of a healthy recognition culture:”

Day-to-day recognition

Ideas here include handwritten notes, small gift certificates, flowers when appropriate, or fruit baskets. Elon and Gostick call these “low-cost, but high touch” recognition. A useful tool they put forward is a recognition frequency log, reproduced in Table 1 below.

Table 1. Recognition Frequency Log


Recognition Frequency Log

My Employees

Week 1

Week 2

Week 3

Week 4

Example: Jim Porath

Extra Effort

Dealt with tough customer issue

Had great cost-savings idea

Source: Gostick, Adrian and Chester Elton. The Carrot Principle

Another useful chart tool they provide for managers is one which allows you to get to know your employees — their strengths and individual motivators, as outlined in Table 2 below.

Table 2. Employee Strengths and Motivators

Need

Employee Name

______________

Employee Name

______________

Employee Name

______________

Career aspiration

What is most important to this person

Strengths to develop

What forms of recognition and awards does this person value?

Recognition ideas

These tools may seem overly simplistic. But, given the hectic pace of today’s feed and grain business and the demands on your time, it is virtually impossible to know when you last acknowledged an employee, what every employee’s preferred form of recognition is, etc. And, these tools keep you from just missing entirely the employee who is never on your radar, but just does a solid job (quietly) day after day.

Above and Beyond Recognition

Employees who go above and beyond should be rewarded with a more formal response from your company. Examples might be implementation of a novel or cost-saving idea, achieving a sales goal or providing exemplary customer service. Recognitions or rewards here might be a plaque with your company logo combined with a cash award (see the How Much to Spend.. and on What? section below for more detail).

Career Recognition

Give some thought to implementing a recognition program for your employees on the anniversary of their hiring date. The authors state that this is the most underutilized vehicle for recognizing and engaging your employees. The simple act of recalling an employee’s hiring date provides an opportunity to put a spotlight on every employee. Just make sure it stays personal — turning this into a ‘form’ celebration devoid of any personal attention will soon undermine any motivational value.

Celebration Events

Find reasons to celebrate — it is fun and will motivate your workforce! Events might be company anniversaries, achieving record results or completion of an important project, and new product launches. We have seen companies rally around service projects such as raising funds for a children’s charity, participating in a 5k race that is a fund raiser, or working at a food pantry. While not strictly a celebration, the chance to work together on a worthy cause can be a source of pride and real accomplishment, and is great PR for your feed and grain firm.

Carrotphobia

Gostick and Elton have a great section of their book entitled “Carrotphobia,” where they elaborate on why some managers do not put forth the time and effort to recognize employees. We thought a couple of these managers’ reasons and the authors’ responses were worth highlighting:

Why would I recognize them? Aren’t they just doing their jobs?” The authors counter that recognition gives employees that extra push they need to do their jobs even better. “They already get too much recognition.” Elton and Gostick characterize high performers as “recognition sponges.” They warn that you should not stop praising these employees... or they just might stop doing what it is you value! “I don’t want to play favorites,” countered by the observation that when you start recognizing performance frequently, the authors point out that you will find it easy and that nobody feels left out – and that it motivates others to seek similar recognition. And finally, “They’ll expect more recognition.” Yes they will say the authors — and when recognition is provided regularly, employees stick around for seconds and thirds — turning out even better results. And, they ask — this is a problem (not)? They sum this chapter up with a quote from a senior business manager: “To be effective, individual recognition should be frequent, specific, timely and public.”

Frequent, specific and timely

Gostick and Elton found in both their North American and global data that effective recognition is frequent, specific and timely. Their survey showed that these factors were most key: recognition must be aligned: it is given frequently to those who are acting in accordance with the clearly articulated goals of their business. Secondly, they found that recognition is best when it is performance based — meaning it is based on specific goals that everyone understands (not favoritism). Finally, they found that recognition needs to be meaningful — awards and/or kudos are presented in a timely manner. This means they are given close to the date of accomplishment and are given in a sincere public ceremony.

How much to spend... and on what?

We hope that you buy into the concept of recognizing and rewarding your employees. The Carrot Principle provides some tools you might utilize to implement a recognition program in your feed or grain business:

1. Level of Recognition broken down into rewarding employee behavior measured as:
a) a small step toward living their (and your feed and grain company’s) values (called “Day-to-Day awards below);
b) a one-time above and beyond action which makes your firm more successful;
c) an ongoing above-and-beyond demonstration of your firm’s values or
d) an action, project or behavior that has a significant impact on your bottom line.

They also suggest some possible annual dollar amounts per employee, to coincide with the several of the levels listed above:
Day-to-Day small step awards = $0: EX: handwritten notes, verbal praise;
One Time Above and Beyond awards = $100 to $200 annually. EX: movie tickets, coffee certificates;
Ongoing Above-and Beyond Awards = $250-500 annually EX: Weekend getaway package, fruit-of-the month award from a catalog company, or perhaps large personal item that can be used with the employee’s family — gas grill, ping-pong table, etc.

2. How much to spend? Gostick and Elton suggest that a place to start for recognition is to spend about 2% of payroll.

3. Regarding awards, rewards and recognition, The Carrot Principle has a super list of 125 ideas that managers can use for praise and recognition. A couple that we liked were:
a) For their recognition, write down the person’s accomplishment and make copies — and tuck them under the windshield wipers of every car in the parking lot.
b) Bring something back from your next business trip for each employee as a thank you.

It doesn’t have to be expensive, just thoughtful.

Carrots — not just for better eyesight!

Rewards, recognition, awards, praise and gratitude can certainly go a long ways to improving the bottom line for your grain and feed business. And, many of these carrots are low cost, but offer much upside in terms of employee attitude and performance. Recognizing employees should become a habit — just something you do automatically when employees have done something worthy of praise — big and small. In addition, this is a habit that will be contagious. When you recognize employees, you are modeling that habit for others. And, we bet it won’t be long before your direct reports pick up this very good habit. We hope we have generated some ideas on your part that will help you motivate your employees to do their best and will also improve their performance and retention in your business. Carrots are great motivators — and can help you see your way to increased success!

Mar 5, 2013

Loads of Benefits Delivered by a Transportation Subsidiary

Whether your business is in the production of feed, the manufacture of pet foods, milling operations — or any other manner of production or processing — you must be able deliver your product to the customer. If a producer does not engage an outside carrier to haul its product, then chances are that one of the most material and burdensome parts of its operation occurs in the maintenance and operation of its transportation fleet.

Improved safety, compliance and tax savings

Running a transportation fleet means managing logistics and dispatch, complying with regulatory controls, and maintaining licenses, registrations and safety files — all on top of tremendous capital expenditures associated with the repair, maintenance and replacement of transportation assets. Across a wide spectrum of industries, companies familiar with the onus of fleet operations have benefited by organizing those operations into separate transportation subsidiaries.

Many companies have realized greater control over compliance, safety and other concerns associated with managing fleet operations after dedicating them to a separate entity. Companies attempting to keep registrations current, manage dispatch operations, monitor compliance with motor carrier safety and other regulations, maintain driver safety files, and keep tractors, trailers, lifts, rolling stock, barges and an assortment of other logistics equipment in good working order, without housing those tasks in a separate entity dedicated to transportation operations, frequently experience such efforts falling into disarray. Moreover, separating transportation operations into a different entity provides protection for a company's remaining assets from liabilities arising from transportation activities, where some of the greatest exposure often exists.

Better compliance and safety and protection of assets from liability are fine benefits that make the creation of a transportation subsidiary highly worthwhile. However, the greatest benefit from transferring fleet operations to a transportation subsidiary may be realized by the effect it can have on a company's tax bill.

A transportation company dedicated to transporting property for-hire whose annual capital outlays for transportation equipment amount, for example, to $1 million, can benefit from sales tax savings in the tens of thousands of dollars by taking advantage of sales tax exemptions. A company's transportation fleet often represents one of its greatest concentrations of capital. The sales tax alone on purchases of power units, trailers, rolling stock, barges and other equipment is enough to make anybody observing cash flows shudder. A company attempting to squeeze extra years out of its equipment in a difficult economy could find much needed capacity in its capital budget by taking steps to become eligible for sales tax exemptions.

Varying exemptions offered in many states

Approximately half of states recognize exemptions from sales and use tax applicable to certain purchases made by common carriers, or public or for-hire transportation companies. Depending on the state, exemptions may apply to purchases of power units and trailers, repair and replacement parts, and the equipment used for repairs, tires, rolling stock, barges, and other equipment and supplies used by the transportation company. States also vary in their application of exemptions based on the use of the equipment. Some states require that the equipment be used in interstate transport, meaning that the equipment must physically cross state lines in its ordinary usage to qualify for exemption. Other states apply exemptions to equipment used only within the state as long as the goods being transported originate or ultimately end up in another state. Yet other state exemptions apply equally to intrastate and interstate uses of transportation equipment. And finally, some states require that a transportation company transport goods for multiple companies to qualify for exemption, while others would grant the exemption even to a carrier hauling product for just a single customer.

What all states offering exemptions share in common, however, is the requirement that a carrier claiming the exemption demonstrate that it is a public transportation company for hire. This means that the transportation company must transport property belonging to another entity in exchange for consideration. A company hauling its own property will not qualify for sales and use tax exemptions in any state. Instead, the transportation company must carry goods for another company and do so for a fee.

A transportation subsidiary can benefit from tax exemptions offered in most states even where its operations are concentrated in providing transportation services to its parent. It first must be sufficiently separated from its parent, both in its organization and its operation.

Sufficient separation of the transportation subsidiary

Separate organization and operation of the transportation subsidiary requires a good deal of effort. Drafting and filing organizational documents, complying with state filing requirements in the states where the transportation company will do business, and registering tax identification numbers are just a few of the steps involved in creating the new entity. The transportation company also will have to establish its own U.S. Department of Transportation number and register operating authorities with the Federal Highway Administration and state regulatory agencies.

Having established an existence, the company must begin the real work of demonstrating that it operates as a public transportation company. States vary regarding the factors considered in determining whether an entity operates as a public transportation company and thus qualifies for sales tax exemptions, especially where the company primarily transports product for its parent. But all states make this fact-sensitive determination, in large part, based on the degree of separation of the transportation company from the business shipping the product and whether the transportation service is provided for consideration. Some of the factors may include whether the subsidiary is sufficiently capitalized, maintains its own books, records and bank accounts, issues its own W-2s, and deals with its parent on arm's-length terms. States also observe whether charges are invoiced for transportation services to the parent and whether the transportation subsidiary carries appropriate operating authorities and insurance.

Achieving the degree of separation from the parent sufficient to qualify as a public transportation company also requires adoption of and commitment to a new mindset. Fleet operations previously performed in-house by the parent company now reside in the new subsidiary. The transportation subsidiary must be in all respects an independent provider of transportation services. Essential to the creation of this distinction is the transportation subsidiary's effort to hold itself out to the public as an available for-hire transporter of property, taking affirmative steps to create a public identity and in many cases seeking opportunities to haul product for unrelated companies.

Efforts to achieve separation payoff in tax exemptions

Clearly the effort and upfront costs involved in creating a transportation subsidiary that will pass the scrutiny of state taxing authorities can be substantial. Nevertheless, with benefits ranging from increased control over compliance and safety and isolation of liability exposure to significant sales and use tax savings, a new transportation subsidiary is worthy of consideration. Projecting the potential tax savings that may be achieved by the transportation company illustrates this point.

Take, for example, a company that budgets $1 million annually in purchases of major transportation equipment — power units, trailers, trucks, barges and rolling stock. If just half of those purchases qualify for exemption, based on the states where the purchases are made and the use of the equipment in those states, then the potential sales and use tax savings would be about $30,000, assuming an average tax rate of 6 percent. Exemptions from sales tax on purchases of repair and replacement parts, tires, fuel and lighter equipment available in many states will add even more tax savings. Within just a few years of creating the transportation subsidiary, the taxes saved should outweigh the initial outlay.

A company currently managing its own fleet operations should talk to a tax professional, who can gather data and assess the potential for tax savings based on the nature and location of the company's transportation-related purchases and activities. The steps to create a transportation subsidiary and transfer fleet assets and operations to the new company should be identified, and the effort to maintain adequate separateness from the parent should be evaluated. Then, once the company determines the filings and registrations required to claim exemptions where the company qualifies for them, let the purchasing begin. The company just might discover the benefits of a transportation subsidiary enjoyed by many others before it.

Feb 26, 2013

Are Computers Needed in Agriculture?

The world is changing rapidly. When I first took over my mom and dad’s agriculture computer systems business 20 years ago, it was a challenge to get cooperatives and other ag-related businesses to see the advantage of automating their accounting, managing the company’s books with computerized management software.

The systems were shockingly expensive and needed staff to run them. Moving into the late 90s, the challenge was the impression that computer systems only cost money and didn’t “make” money. I’d hear, “That spreader over there brings in cash. What can that computer bring me?”

Today, without a computerized solution to manage your business — and not just accounting, but all of your corporate diversities — you not only are losing customers, you’re biding time until your neighboring competitor will pounce on this weakness. The ag-focused computer systems that exist today are proven solutions, will show an immediate return on investment (ROI) and will convince your customers that you are partnered with them for the future of their business.

The computer systems and automation available for managing grain, the core of many ag businesses, are leading edge. RFID reading of trucks as they enter the facility creates efficiencies and deepens relationships. Message boards showing who they are and what crop they are carrying as they pull onto the scale put a smile on the drivers’ faces who know they are being cared for right from the start. Emailing the scale ticket to the farmer completes the process.

The ability to email grain settlement information and ACH the dollars to the farmer’s account shows that you care enough to put the money in their hands as quickly as possible. Invoices, statements, grain contracts (with signatures), AP vouchers, payroll stubs and much more can all be emailed automatically, reducing the amount of paper generated from the business. With these automations come auto pay capabilities. You can have all of these items directly deposited, and reversely, pull from your customers’ accounts.

In the agronomic portion of your business, the software solutions available blend product based on historical data from the field, dispatch the product to the equipment in the field, allows changes to the blended product as it moves through the field, brings it back to the system, and still offers prepay and other contracts to bill it to precision. Furthermore, this is all immediately viewable on the web.

Many ag businesses need to track their “position” of products, so when they purchase product from a vendor and then sell it to the farmer, they always know exactly how much inventory they have on hand. And with computerized management, this is all available on a hand-held device.

And this is just the tip of the iceberg. If you feel as though your agronomy business is falling behind on the technology playing field and don’t have a computerized management system in most or all the areas of your business today, you are missing the “sure-hit” that will take you to the next generation of agriculture.

Jan 21, 2013

GEAPS and K-State Expand Distance Education Program

To meet increased interest and demand, GEAPS and Kansas State University have worked diligently to create a program that is expanding each year in scope and value, and 2013 is no exception. We’re adding four new courses and updating another. And we’re also likely to see the first students earn our new Grain Operations Management Credential.

The credentialing program, which began in 2012, adds an important dimension to the distance education program. This is the industry’s only credential in the field of grain operations, and allows professionals the ability to enhance their careers and validate the knowledge they have gained through distance education courses. Participants will find that the credentialing program offers them systematic routes to achieve professional-development goals, college credit, and industry-wide recognition for initiative. In addition, the credential enhances qualifications for promotion and taking on additional responsibilities. Besides benefiting professionals on an individual basis, the credentialing program offers the grain industry an organized, meaningful and inexpensive way to train new employees and enhance job skills of existing employees, as well as resolve the need to identify and cultivate the next generation of grain-operations professionals.

On April 22, GEAPS is launching the last course needed to earn the credential, GEAPS 500: Introduction to Grain Operations. It’s geared for people who are new to the industry or who need to learn the basics of grain handling. No other course like it exists anywhere.

The five other courses required to obtain the credential are: GEAPS 510: Facilities Planning & Design I, GEAPS 520: Grain Quality Management, GEAPS 530: Quality Management Systems, GEAPS 540: Safety and Management for Grain Facilities and GEAPS 550: Materials Handling I. Recognizing the value, three companies have indicated they plan to have groups of their grain operations employees pursue the credential, and as word travels among the industry, enrollment in these courses is steadily increasing.

Along with the addition of the credential, the number of distance education courses has increased in the last couple of years. We offered 12 courses in 2011, and 14 courses in 2012. This year, we’ll be offering 19 and next year 21. As noted, the growth is driven by demand and interest. Over 60 professionals registered for the first course of 2013, the recently updated GEAPS 520: Grain Quality Management. The four new distance education courses being offered in 2013 are: GEAPS 500: Introduction to Grain Operations, GEAPS 510: Facilities Planning & Design I, GEAPS 544: Preventing Grain Dust Explosions, and GEAPS 555: Grain Elevator Equipment Maintenance II.

Distance education allows working adults the flexibility needed to achieve educational objectives from the comfort of their home or work computer as everything can be accomplished online. Interested individuals should peruse the 2013 course schedule for topics they find pertinent as there is a wide variety of subject matter to choose from. Of immediate interest may be the two courses listed below, both beginning March 18, and the intro course that mentioned previously.

GEAPS 525: Management of Insect Pests

Registration closes March 12.

This course focuses on insect pests associated with stored grain, and provides fundamental knowledge required to manage insect infestations using practical nonchemical and chemical methods.

GEAPS 540: Safety Management for Grain Facilities

Registration closes March 12.

The goal of the five week course will be to enhance the basic knowledge and skills of operations management staff within the grain handling and processing industry in order to minimize the most significant worker safety and health risks in the industry.

GEAPS 500: Introduction to Grain Operations

Registration opens March 20 and closes April 16.

This course provides basic but comprehensive information about operations at grain facilities, and serves as an introduction to new hires, students and others in need of beginner-level training. Stressing safety, it focuses on how grain moves through a facility, and covers main elevator types, components and equipment, grain receiving, sampling and testing, housekeeping and maintenance, fumigation, outbound procedures and other fundamental grain-facility functions.

GEAPS and K-State are extremely proud of the 2013 distance education program offerings and are energized by the industry support we’ve seen and continue to see as the program progresses. None of this would be possible without the hard work and expertise of GEAPS members who dedicate their time and talents. GEAPS and K-State look forward to continuing to provide the grain industry with high-quality distance education opportunities.

To find out more about GEAPS/K-State distance education, please visit http://www.geaps.com/knowledge/dist_learn/index.cfm.

Douglas Forst is the president of CMC Industrial Electronics and Chairman of GEAPS' Distance Education Program Oversight Committee.

Jan 17, 2013

Moving Rocks

Those who need to worry about barge traffic on the Mississippi River got some good news in mid-January. The Army Corps of Engineers completed “the first phase of the most critical rock removal work on the Mississippi River near Thebes, IL, ahead of schedule…” yet, just in time. The river typically is at its shallowest in January, improving in February. Lets hope that holds this year.

According to reports, in just three weeks they increased the river’s depth by two feet, keeping that stretch open. Amazing how we can blast, grapple and move rock when we have to. But clearly that’s much easier than getting fast, smart economic decisions from government. The fact is our transportation system is suffering far beyond the banks of the Mississippi.

Last summer, Ken Eriksen of Informa Economics spoke at our Interconnectivity Conference. His presentation, in part, focused on domestic transportation infrastructure. He pointed out that transportation options are improving, slowly, in those countries most competitive with the U.S. when it comes to ag production. And that transportation infrastructure problems in the United States are hurting our ability to efficiently move products to export. Inefficiency means lower transport capacity, leading to higher costs.

While the rail industry is a bright spot, investing billions in improvements, other areas are suffering. We’re losing miles and miles of ‘functional’ rural roads each year as their condition deteriorates, and our aging bridges, along with the Mississippi River lock system, add further risk. If this erosion in infrastructure continues, it will have a rather dramatic impact beyond the farm gate and our country elevators. Eriksen said that getting products to “the second order of consumers in the supply chain” generates 1.5 million jobs, over $41 billion in labor earnings, more than $352 billion in U.S. output and greater than $74 billion in value added on the U.S. economy.

I don’t pretend to understand global economics, or fiscal cliffs or debt ceilings. I do understand that investment in infrastructure means jobs, jobs help families and they boost tax coffers. That’s important. Whether locally, with state and national associations, with senators and congressmen, I hope you can raise this issue and push for smart investments that create jobs now and long-term competitive opportunity for the country.

Jan 10, 2013

Cost Advantages of Point-of-Use Dust Collection in Dump Pit Applications

Grain, feed, and seed facilities are often faced with a dirty situation when designing dust collection for rail car and truck dump pits. Designing a dump pit with good dust collection in mind not only addresses the dirty situation but can save you operational time and money.

Traditional dust collection for these applications includes local hoods that capture nuisance dust using large volumes of air that are then transferred to a remote baghouse dust collector. With an integrated point-of-use dust collector, nuisance dust from the grain or seed is still captured at the pit, but it can remain with the primary grain in the pit, eliminating any need for a duct system to a large remote baghouse dust collector. Designed correctly, integrated dust collection can save potentially 25% to 50% of installed cost compared to traditional remote baghouse dust collection.

In facilities that utilize several dump pits, a centralized system pulls air from all dump pits, even if only a few are active. With a-point-of-use system, air extraction (and the energy costs for operating fans) is only performed for the active pits. Inactive pits are left idle, rather than adding unnecessary air volume to the centralized dust system capacity.

Integrated point-of-use dust collection uses the same slotted baffles as traditional dump pit systems to control airflow at the dump pit opening. While grain is loaded into the pit, baffles swing open to allow grain to enter while leaving much of the unused pit area closed. After loading is completed, the baffles return to a closed position to restrict nuisance dust from exiting the pit. Point-of-use collectors stationed on either side of the pit create a slight negative pressure in the pit to capture nuisance dust. Dust pulsed from the filters during operation returns back into the pit and exits with the process grain stream.

Ideally, point-of-use collectors should be integrated into the original layout of the dump pit, but there is often space on one or both sides of existing pits to accommodate the installation of smaller point of use collectors. Once integrated, this method of dust collection provides many cost savings and maintenance benefits.

Reclaiming grain

Grain pulled into the waste stream of conventional baghouse dust collection is often lost. It can sometimes be introduced back into a process stream with bucket elevators or conveyors, but these represent added capital and operational costs. Further, if more than one type of commodity is processed at a facility, the mixture from a traditional baghouse collector may complicate return to the process stream. Point-of-use collectors eliminate this complication as they keep grain and dust within the original process stream.

Significant savings

Besides saving product otherwise destined to become part of a waste stream, point-of-use collectors can save both capital and installation expense, while having a positive impact on operational cost.

Because point-of-use collectors only see short duration surges of loading, a few smaller collectors replace the traditional large baghouse. Shipping costs for smaller point-of-use collectors are often much less, and eliminating ductwork lowers installation costs substantially compared to traditional remote dust collection. In addition, the reduction in ducts will reduce fan static requirements, allowing selection of smaller, less expensive fans and controls.

Of the potential costs in a dump pit process, yearly energy consumption offers the most notable cost avoidance when considering point-of-use dust collection. As an example, a pit measuring 10 feet by 25 feet in a conventional design might require a fan with as much as 155 HP. A point-of-use collector approach would require smaller fans totaling only 115 HP. At an estimated $0.15 per kilowatt, and assuming the pit is running 24 hours a day, the yearly operating cost for a conventional baghouse system totals about $167,000, while the the lower horsepower point-of-use system totals only $123,900. In this example, the facility would save approximately $43,000 a year.

Reduced down-time

As a final consideration, look at the down-time consequences on a facility when filters finally need to be serviced or replaced. A traditional baghouse will require several workers to enter the collector for filter replacement (often considered a permit-required confined space). By contrast, filters in point-of-use collectors are typically changed with relative ease from outside the collector, with filter replacement typically only requiring a single worker. The units in our earlier example could be fully serviced in just a couple of hours.

As one can see, designing a dump or rail pit dump station, with a point-of-use dust collection approach at an early stage will address a dirty situation while allowing you to save money both initially and throughout the operating life of the resulting system.

For more information, visit www.donaldson.com.

Nov 28, 2012

America's Barometer

Garciliaso de la Vega may have exaggerated. As historian of Hernando de Soto’s explorations, in 1543 de la Vega described a great flood on the Mississippi River stretching “20 leagues on each side of the river,” and lasting 80 days. Forty leagues is roughly 120 miles, and we can’t know how de la Vega arrived at his number, but it was an impressive flood by any measure. The Great Flood of 1927 was estimated to "only" stretch 80 miles across at its peak.

The Mississippi River is a 2,300-mile marvel of nature that drains 41% of the contiguous states in a basin covering more than 1.2 million square miles, from Montana to Virginia. When inundated from its tributaries, the river’s flow rate at St Louis has reached 800,000 to 1 million cubic feet per second (cfs), as in 1993, but during dry times has fallen as low as 25,000 to 30,000 cfs as occurred in early 1940.

The Mississippi is America’s barometer -- reflecting long-term conditions, as well as short-term events. And this season the river warned us we’re in trouble. Scientific American noted in a November article: “Rising temperatures, persistent drought, and depleted aquifers on the southern Great Plains could set the stage for a disaster similar to the Dust Bowl of the 1930s…"

The extreme drought of 2012 slowed the Mighty Miss to 60,000 to 75,000 cfs at St Louis by November, and dropped water levels to a record low at Memphis. This was even before the U.S. Army Corps of Engineers began its annual mandated winter reduction in the discharge rate out of the Gavins Point reservoir, the southernmost of the six Upper Missouri River reservoirs. Cutting the reservoir discharge from 37,500 cfs to 12,000 cfs in December further slowed the flow rate and lowered the water level on the Mississippi below St. Louis.

By mid-December 2012, the water level south of St. Louis and north of where the Ohio River joins the Mississippi is now forecast to drop low enough to expose dangerous rock "pinnacles" -- and potentially shut navigation altogether in that stretch. The Corps has plans to blast the pinnacles in February, but it’s a complex job and navigation will remain a day-to-day problem until then. America’s "barometer" could turn into a figurative minefield for barges.

Soybean exports by late November 2012 had already hit a record high 600 million bushels, against record total sales of 1 billion bushels (for that early in the crop year) -- sales that are largely expected to be shipped by late winter with a large percentage being shipped from the Gulf. Corn and wheat export sales are low this season; river disruptions will impact soybeans more.

Merchandisers everywhere have a major interest in the water levels on the Mississippi. Too much water or too fast a flow and barges can’t move properly and freight costs rise. Too little water and shippers have to reduce the load on barges to cut the draft level -- how low the barges ride in the water -- and often must cut the number of barges a single tow can handle. Inefficiency raises freight costs and that affects logistics and basis.

Gulf loadings of corn, soybeans and wheat run 35- to 60-million bushels per week, and southbound barge counts can run 200 to 1,000 per week (10- to 50-million bushels). Barge freight is traded as a percentage of a base rate and rises or falls quickly when river conditions change. The short-term implications of river disruptions can impact basis far and wide as logistics and costs change. One consolation: This year’s problems lie north of where the Ohio River joins the Mississippi at Cairo, although the river could hit record lows as far south as Memphis.

  • Barge lines can move their barges south of the threatened area -- to the Ohio River or the Lower Mississippi.
  • Loadings would shift to those regions, which in turn supports basis levels there.
  • Load restrictions push barge freight higher and weigh on upriver basis.
  • Illinois River locations would tend to see basis weaken as loadings slow or cease.
  • Surrounding domestic markets can rise or fall as river basis changes.
  • Exporters are turning to unit or shuttle trains to source a larger percentage of the corn and soybeans for the Gulf, which in turn can support subterminal basis at origin.
  • More Asian sales could be diverted to the PNW, supporting PNW basis values.
  • Secondary rail freight values should begin to rise on the increased demand for trains.

The merchandising ripples will continue to widen depending on the length and severity of the river problems. But unless there’s a dramatic shift in the dry weather pattern of the Western Corn Belt and the Plains, this will be a long rough winter that could be followed by an equally challenging spring and summer. The Plains drought is as severe as seen in any fall for decades, with NOAA’s seasonal outlook showing the drought to persist through the winter. That raises questions about 2013 crops.

The 2013 hard red wheat crop is already threatened. “Good/excellent” ratings were at record lows through November, with most of the Plains wheat rated 40% or more “poor/very poor.” Fall ratings don’t determine final wheat yields but they can sure raise red flags. Pasture ratings are even worse: Nebraska was last rated at 97% P/VP, with Kansas and Oklahoma at 79% and 69%. KC wheat futures are almost $2 over July 13 corn, which sharply lowers the prospects for feeding wheat in the Plains in 2013.

Predicting the 2013 corn and soybean crops is pointless at this stage. But we can lay out a range of possibilities and consider a few ramifications. Let’s assume a repeat of 2012 acres and go from there.

These tables assume planted corn acres remain at 97M and that soybeans acres are about 77.5 million. Scenario A assumes widespread problems similar to 2012. Scenario B uses low yields in the Plains and Western Corn Belt, but good yields in most other states. Scenario C raises the yields slightly in the Plains versus Scenario B, and Scenario D assumes a reasonable recovery from the drought. As production prospects rise, the scenarios assume usage will also increase, on less wheat feeding, higher ethanol production and exports. A fifth scenario could be considered: Lower acres accompanied by the drought expanding eastward with further cuts to yields from this year. A crop of less than 10 billion bushels (2.8 billion on soybeans) would be catastrophic and require even more extraordinary cuts to usage combined with imports to cushion the shortfalls.

These are scenarios -- not predictions -- and reality could turn out very different. Just the right rains at just the right times can pull modern hybrids through a lot of adversity, for example. Just look at the final soybean yields of 2012.

And disappearance will be influenced by production in South America as well as in the United States. And how fast will usage recover even if U.S. crops are bigger? U.S. soybean disappearance was 3.2 to 3.3 billion bushels until this year, with corn at 12 to 13 billion bushels.

Ending stocks of corn might be able to recover somewhat by 2014; much would depend on how fast usage recovers. But with the continuing growth of soybean crushing in China, demand for US soybeans could increase as fast as production recovers and keep US stocks tight into 2014 crop!

America’s barometer may be warning us the United States is heading into another Dust Bowl -- only time will tell. But short-term weather conditions can change and a shift to a persistent rainy period this winter would ease the river problems and improve prospects for 2013 crops. Until widespread rains materialize in the Plains and Western Corn Belt, however, it’s wise to consider the potential for another year of reduced production, high prices, margin calls, tight stocks, minimal carries in futures, river disruptions, with the resulting merchandising challenges. Make sure your credit line for hedging keeps pace with rising prices, keep margins wide on forward bids, and watch contracts and counterparty credit exposure on open purchase or sales. And watch the barometer!

Nov 20, 2012

Uncertainty and Risk: How Are You Planning for It?

The weather is always a major source of uncertainty for all agricultural businesses and as a manager in the feed and grain industry, you know this very well. Certainly those of you operating in the Midwest did not expect the drought to be as long and devastating as it was during the summer of 2012. Yet, there were some regions where there was ample rain and agricultural production was very good to excellent. Still others of you in places like Texas are dealing with drought conditions extending beyond a single season. In the feed and grain business these dramatic weather conditions greatly affect your volume of business and your bottom line.

Risk and uncertainty are a reality for your business — so what are you doing about it? How are you planning for it? Three common ways of dealing with risk are: ignore it; extrapolate from current trends; and raise the hurdle rate (the minimum rate of return on a project or investment) on all new projects. While there are instances where any one of these reactions may be appropriate, a systematic plan for dealing with risk and uncertainty can help put your business in a better position.

Uncertainty creates both opportunities and challenges. When the discussion of risk and uncertainty comes up usually the negative or downside aspect of uncertainty is what is considered — but there can be opportunities as well. A systematic approach to evaluating, planning for, and implementing a strategy to deal with uncertainty is needed. In this article we discuss some of the different sources of uncertainty and then lay out a plan for developing a strategic response to uncertainty and the risks created. Sources of Risk and Uncertainty

Uncertainties can be broad-based, like the weather example noted above or they can also be more local and specific. Have you ever seen prices make rapid movements when you have been concerned about your exposure in the market (having bought grain and not yet sold it, or having sold it but not yet bought it)? Even with the best hedging policy you may find your business exposed if price fluctuations happened quickly — before you got your original decision hedged. All businesses, at one time or another, face the unexpected departure of a key employee, another source of business risk. On the upside, uncertainty can bring about positive events. The important thing is to plan for risk and uncertainty.

Sometimes events happen that are totally unexpected. It is generally not the case that no one ever imagined that something might happen — rather, when the idea was raised, the reaction was “no that could never happen.” With the news of Hurricane Sandy fresh in our minds as we write this column we see one such example. While there were many who talked about the possibility that a major hurricane could hit New York City, many dismissed those calls of concern, noting one reason or another as to why such a catastrophic event would not actually happen. Still further, the possibility that just days after a major hurricane hits New York City and the east coast the chance that a second storm would bring ice cold temperatures and snow was yet further outside of the realm of possibilities.

The purpose of this article is not to scare you into running out there to put a plan in place for every remotely possible event that could happen. While it is important to be prepared in business, you also have to pay attention to your use of scarce resources. Being fully prepared for that once in every 200 year event will most likely cost your firm more than its worth. However, systematically developing your plan for dealing with risk and uncertainty is what is needed.

A Six Step Approach

We borrow the planning framework from Elizabeth Teisberg (Harvard Business Review, 9-391-192) as a step by step approach for developing your plan for dealing with risk and uncertainty.

1. Brainstorm a list of uncertainties

The purpose in this first step is to come up with a complete and comprehensive list of the uncertain events that could happen to your firm. When thinking of the uncertainties it is helpful to think of those things that the world can throw at you. At this stage you are not thinking about the decisions that you make, but rather the “events” that can happen. These can relate to: weather, government policies, employees and human resources, and competitor actions.

Start broad and then get more specific. The broad examples might reflect events like large-scale weather events or changes in government policy that impact how you do business and what that costs your feed and grain business. More specific events could be very local in nature, such as an action by a key competitor, the decision by one of your major long-term customers to take business to another firm, a member of your management team getting injured or taking sick such that they are unable to work and carry out the decisions that the business depends on from that person. Local weather events can also be an example of something at the micro level. These are all uncertain events that your business could face, and if they happen, would have a significant impact on your bottom line.

2. Identify Strategic Choices for the Firm and Consider the Inter-relationships Between Uncertainties and the Choices

At this stage you want to identify for each of the uncertainties that you noted in number 1, strategic responses that you and your firm could make. This is the stage where you identify potential decisions or actions. These are the things that you can “do.” You might think about mapping this out as a decision tree. Start off with several initial branches of your tree, one for each of the uncertainties that you identified in #1 above. Then from each of the first round of branches insert another set of branches. On each of these new branches identify a possible strategic response that you and your firm could take to that uncertain event. By the time that you have finished, you will have a very comprehensive diagram with possible events and a whole set of strategic choices.

3. Develop Internally Consistent Visions of the Future

At this stage you can take your comprehensive diagram from #2, and consolidate it into something more useful. Examine the comprehensive diagram and using your judgment and expertise as a manager, develop a set of internally consistent visions of the future for your firm. So, how many of these visions should you develop? Teisburg specifically indicates that it is not appropriate for an outsider to dictate how many different visions to formulate – rather that will depend on your industry and what works best for you. The idea here is to develop a set of plausible paths that the future could hold for your business. We suggest something greater than 2 or 3 but fewer than 10.

For example, say that one of your risks is that a key competitor is purchased by a new owner, who appears to have a relatively aggressive competitive streak. Plausible responses might be:

  • Do nothing
  • Seek out a buyer for your business: an outside buyer, or sell to the expanding competitor
  • Expand your business on your own: slightly, moderately, aggressively
  • Merge with a different competitor
  • Purchase one of your regional competitors.

These are eight plausible paths, each of which would require a different plan to execute. While our example is generic, if it were to occur in your marketplace — you could fill in the names of the players and make determinations as to an appropriate strategy.

4. Check Whether Uncertainty is Critical to Decisions

Now consider each of the uncertainties and the responses that you have laid out. Ask yourself if there is really anything that you can do associated with this uncertainty. If there are actions that you can take ahead of time such that the impact of the event will be different for your business then these are uncertainties for you to pay attention to. For all of those uncertainties where there is nothing with respect to your actions that you would do differently irrespective of the event — then these are uncertainties for you to “put on the back burner.” In other words, pay attention to those uncertainties that are critical to the decisions that you would make.

5. Formulate Strategic Responses to Uncertainty

Now that you have done all of the background work you can lay out your strategic responses to uncertainty. In other words, develop your plan. For example, you may modify and update your hedging strategy for addressing commodity price risk. You may examine your various insurance policies to see if your level of coverage is adequate to cover risks or uncertainties you have identified. Do you have someone in your business responsible for regularly monitoring changes in the Farm Bill and other government policies and evaluating the implications for your business? Have you considered the diversification of your business and whether you have the appropriate level of diversification to handle unexpected events?

Evaluate different strategies, make your action decision

In this sixth stage you implement your plan and as you implement your plan evaluate how it is working and make adjustments accordingly. Once you have updated your hedging strategy an important step in implementation might be in-service training for you and your employees so that everyone is on-board to implement the new strategy. Follow through with your insurance agent(s) and update your insurance policies. Sometimes updating insurance policies may even result in lower premiums. Even in those cases where you have higher premiums, remember that your analysis has shown that these premiums are worth it because your risk of exposure is now much less. Set up a time to meet with the employee responsible for monitoring changes in government policy to go over upcoming changes. Arrange to have one of the agenda items for an upcoming board meeting be the consideration of the appropriate level of diversification for the business to address marketplace uncertainties.

Implement strategy for risk mitigation

In the feed and grain business you face many risks and uncertainties. We identified some earlier in this article and you may also face: storage and transportation challenges; feed contamination that results in sick or dead animals; changing market demands for new services such as identity preservation or special measurement of quality traits; loss of grain quality during storage in your facility; and technological risk related to new feed formulations or new grain handling equipment.

As you implement your strategy for risk management keep in mind that many of these uncertainties represent opportunities as well as challenges. If you have back up plans in place for these unexpected events you may well find yourself with a competitive edge over your rivals in the marketplace. Some strategic steps on your part might be to consider things like how much grain storage you have; what capacity you have for unloading deliveries and loading outbound product; safety training for all employees to minimize the risk of workforce accidents and a deliberate employee retention plan to avoid having your key employees recruited away by your competition.

The take home message of our column is that we can never reduce all the risk and uncertainties in the industry, and that it pays to think deeply and broadly about potential risks and how your feed and grain business might respond. While we don’t want to keep you up at night — some of those dreams can be sweet ones — that come with opportunities that are presented by the risks and uncertainties in the marketplace.

Nov 15, 2012

Proud New Partner

The American Meat Institute (AMI) is proud to be a partner in this year’s International Production & Processing Expo (IPPE). The trade show is a unique opportunity to bring together representatives from the meat, poultry and feed industries under one umbrella to share new technologies, education and networking from feed through distribution.

AMI represents the interests of packers and processors of beef, pork, lamb, veal and turkey products and their suppliers throughout North America. Together, AMI members produce 95% of the beef, pork, lamb and veal products and 70% of the turkey products in the United States. The Institute provides legislative, regulatory, public relations, technical, scientific and educational services to the meat and poultry packing and processing industry.

The International Meat Expo (IME), sponsored by AMI, is the premier U.S. trade show featuring the latest in equipment and supplies for processing and packaging red meat products. Formerly known as the International Meat, Poultry and Seafood Industry Convention and Expo, it is a natural fit for us to collaborate with the International Poultry Expo (IPE) and the International Feed Expo (IFE), under the IPPE name. IPPE’s goal is to forge the world’s premier trade show focused on the meat, poultry and feed industries, with opportunities for learning and conducting business for all aspects of the business, from farm to fork.

On the IPPE show floor, you will find more than 1,100 exhibitors covering 420,000 square feet. The exhibitors cover a wide range of meat, poultry, and feed packing and processing technologies, equipment and supplies. We expect more than 25,000 industry leaders in Atlanta during the week visiting the show floor and attending workshops.

We have put together an extensive education lineup in conjunction with IPE and IFE. There is something for everyone with programs ranging from one-hour technical workshops to full day conferences. Session topics vary from maintenance and sanitation to social media. The programs are open to attendees of any of the shows.

Of course, we also want to give attendees a chance to network with colleagues within and across industries. We hope that networking sessions on the show floor on Tuesday from 4-6 p.m. and Wednesday night at the Georgia Aquarium will help foster new relationships amongst professionals spanning the feed, poultry and meat industries.

If you are a feed industry professional working directly with the meat packing and processing industry for the first time, we look forward to the opportunity to get to know you and learn more about your work as well. Together we can make the IPPE the only show professionals in the meat, poultry and feed industries need.

Nov 13, 2012

Property Expansion Considerations

It’s a challenge with which every operation struggles: when to expand facilities to accommodate your growing business, and how to accomplish that expansion in a way that satisfies your company’s unique needs, goals and issues. Businesses within and supporting our nation’s agricultural industry, regardless of their sectors, face unique expansion considerations, such as varying space requirements with the passing of seasons, the need for neighboring property and the goal of preventing competitors from gaining access into your market. Taking time to really consider why your company needs extra space, for what purpose it will be used, and when and how often it will be used — all before the need itself is at a critical level — can help a company avoid costly mistakes, more closely fit its expansion plans to its actual needs and be better able to recognize a good opportunity when it arises.

Sometimes strategy and opportunity combine to make expansion of your current facility or operations particularly attractive, even if expansion wasn’t already on your company’s agenda. A neighboring property coming up for sale or lease is an opportunity that should be carefully considered, even if the growth which would necessitate that extra space isn’t anticipated for a few years. Likewise, space being made available by an existing competitor exiting the area, or the availability of space that allows a new competitor easy entry into your market each require thoughtful consideration. If a company has taken the time before these opportunities present themselves to plan its expansion strategy, the question of whether these “out of the blue” opportunities really make sense is more easily answered.

The following topics explore considerations that should factor into any discussion regarding expansion and can help guide a company through the process of determining the right time and right way to expand.

What are your needs and opportunities?

Seasonal expansion can be an excellent solution for companies whose needs for extra space come and go, whether it be for storing extra vehicles or equipment used only during the busy season, staging areas for vehicles waiting to load or unload, or temporary or seasonal storage of excess goods or raw materials. In these cases, important consideration should be paid to whether there are issues that would justify controlling the area year-round, or if occupying – and paying for — the area only when needed is a viable solution. If your business’s strategic plan includes expansion in the coming years, then keeping an eye out for properties, either near your current facility or in a new location, is critical. However, it’s important to know what you need, how much you need, and why you need it, before an opportunity presents itself. Conversely, sometimes an opportunity to expand into a new market, to keep a potential competitor from making a move into your area, or to lease or acquire a neighboring property that could be useful in the future, are situations in which opportunities necessarily have to get ahead of strategy.

What will you use it for?

Are you looking to expand because you need larger indoor storage facilities? A staging area for vehicles? A larger office for administrative functions? Something else entirely? A company’s day-to-day use of space is typically the first topic that arises when considering expansion. Use this opportunity to critically examine how the company operates out of its current location, how it achieves its business goals, and ways that those activities can be optimized, improved and enhanced by having a larger or better physical space. In some cases, a company can satisfy its needs for more space by leasing nearby space on a temporary or recurring seasonal basis and only incurring rental costs during the months that they really need the extra room. If a company really only requires seasonal access to the added space, is there a strategic partnership that can be explored to co-locate operations with another company that needs it at different times of the year? Conversely, does it make sense to acquire a more remote and lower cost site, which the company can use seasonally but control year-round, to ensure regular access and avoid risks associated with third parties operating from the same location at other times? Sometimes, when a company’s operations include potentially hazardous activities or carry the risk of environmental contamination, the benefits of having sole control of the property far outweigh the savings achieved when that savings is accompanied by increased risk. Additionally, many companies find that they will use the new space much more than originally anticipated simply because it’s available.

Where do you go?

When looking to expand your current facility within the same geographic area – distinguished from opening an additional location or facility nearby – most companies find that expanding into land that shares a property line with your current location (known in real estate parlance as contiguous property) is the easiest way to go. While contiguous expansion has significant advantages, many agricultural operations find that it’s not critical, especially when non-contiguous space offers a significant cost advantage. Being willing to consider non-contiguous properties, even those a few blocks or a couple of miles away from your current location, can provide price advantages and a larger selection of attractive sites. It also reduces leverage for a neighboring property owner who thinks he or she can sell or lease a contiguous site at a significant profit because of the convenience which it offers. Additionally, in today’s world, with the ease of communication between remote locations, many operators find that there is no operational disadvantage – and often unexpected advantages – to having a facility spread over multiple locations, especially when the price of entry can free up capital needed to otherwise grow and develop the business.

How will you acquire the space?

Another consideration of expansion is how you’ll take control of the property you’re seeking to utilize. Purchasing and leasing, or even entering into a short-term license agreement, each have their pros and cons. Generally speaking, purchasing property on which you intend to build a facility provides the greatest measure of control, but also requires the greatest up-front investment. Beyond the purchase price and construction costs, take into account the fees of the various professionals who will help you evaluate the property; examine title; conduct geotechnical, soils and environmental studies; and obtain the approvals and permits necessary to construct and operate. Some companies enter into ground leases or build-to-suit arrangements as a way to structure the financial investment needed to expand. Others find already constructed facilities that require little customization and are prime targets for short- or long-term lease arrangements. Remember that whenever a company looks to lease a facility, the greater the investment the company looks to make, the longer the lease term (or additional options to extend an initial lease term) should be, to protect the company’s investment.

The path between realizing a company wants or needs more space, and moving into or onto that new space is full of twists and turns. There are many decisions to be made, and considerations to be taken into account, with nuances unique to every company and business model. The key to all of this is being mindful, organized and considerate in your approach. Don’t assume that because you have a facility in one place, the new area must be immediately adjacent. Likewise, just because you’ve always leased your facilities, don’t discount the prospect of making a strategic purchase. Good opportunities are available, and if well executed, a need for more space can serve as a multiplier: giving a business an opportunity to use the needed expansion as a way to not just meet a need but also to optimize processes and look at business strategy through fresh eyes.

Whom do you call to learn more?

Any time a business is exploring the prospect of expansion, your county or town planning department and local realtors can serve as excellent sources of information and assistance. As choices are narrowed and decisions regarding the type of expansion are reached, a business-oriented transactional attorney who can help negotiate the deal, structure the transaction, prepare the documents, and oversee the inspections and due diligence, can be a great partner in the process. Finally, engaging the company’s financial professionals and CPAs is critical to ensure that the new acquisition is integrated with the company’s overall tax and financial strategy. With a bit of advance planning and the help of a team of professionals to guide you, the decision to expand your business’s footprint can do more than just meet a need; it can be the first step to a more profitable future.

Sep 17, 2012

Follow the Signals

In our last issue, elevator owner Mike was reassuring his son Jason that even in severe drought years such as 2012 there are ways to make money. Mike reminded Jason to “remember Granddad’s words: Don’t panic; learn to respect market signals.”

Crops are small and demand must be curtailed. Market signals in 2012 crop are already loud and clear: Corn almost doubled in price since the fall of 2011; soybeans went more than twice as high, almost to $18. Futures spreads in corn and soybeans range from minimal carries to steep inverses to encourage movement. Corn basis remains near record high levels in many markets with harvest nearly 25% complete, but is record cheap along the lower Mississippi River. The 2012 crop demands a new playbook to understand these signals!

Demand must fall in all sectors. Ethanol production from corn is forecast to decline by 10%, possibly more, and feed consumption of corn and DDGs will decline as well. Soybean crush will drop by a record 12% to a 17-year low 1.5 billion bushels, which then cuts soymeal production by 5.5 million tons. The US just doesn’t have the soybeans to crush – unless they’re imported from South America next summer.

The first-half of the soybean crop year will show heavy disappearance, followed by a steep decline. Soymeal users already find it nearly impossible to purchase meal past winter from some sellers, for example, and only at extraordinarily high basis from others.

Soybean exports will fall 305M bushels to a 7-year low 1.1B bushels, yet export sales were already a record high 762M bushels by early September – mostly for shipment by late winter. This could mean near record-high weekly soybean exports until South America’s harvest begins about half-way through the US crop year. By then US exportable inventories could be nearly depleted anyway.

Regional dislocations will be pronounced at times due to the varied impact of the drought. The Midsouth and Delta states are already struggling with space; corn basis plummeted to -100 Dec in September on the combination of low water on the Mississippi, slow corn exports, and the usual reluctance of exporters to fill vessels using only new-crop southern corn. At the same time, northern ethanol plants were bidding record premiums and finding little for sale.

Iowa’s entire soybean production is the lowest in a decade and less than Iowa typically crushes each year. Illinois production is the lowest since 1984. Yet Arkansas, Louisiana and Mississippi will each harvest record soybean production, and Arkansas is wrapping up a record corn harvest, with Louisiana and Mississippi at their 2nd largest corn crops ever. Indiana’s corn crop is around 600M bushels, yet disappearance typically runs 900M+. Iowa’s corn crop is 400M bushels short of typical disappearance but Minnesota’s corn crop is slightly above usage of recent years. These and other anomalies mean sellers need to watch markets outside their usual territory to find the best deals.

Jason’s Granddad was right: Listen to market signals. The 2012 US corn crop is 1.1B bushels below last year’s disappearance on corn and 500M bushels below on soybeans. But even so, the market doesn’t need all of the bushels in the first month or two of the crop year. When local supplies are sufficient and farm/elevator selling fills the pipeline, carries will build through nearby basis weakening or deferred basis rising. The huge Delta corn crop pushed basis in September to -100 Dec along the river; yet bids for December remained around -0- Dec for a basis return of $1/bushel for three months for folks who could buy and hold the corn. Some of the cheap corn moved north to elevators that wouldn’t otherwise fill this fall. Follow the signals!

Conversely, when nearby local supply or movement is not sufficient, basis will rise to draw out hedged inventory and then DP inventory, from local elevators, or to attract bushels from farther away. Deferred basis will tend to remain weaker in these cases, to discourage holding.

Futures spreads reflect fundamentals but are also pulled and tugged these days by outside forces. Managed money and even the algorithmic trading firms can quickly concentrate enough volume in nearby or deferred futures months to distort spreads as well – even if temporarily. (As funds built a record large position in soybean futures, was it really ‘right’ fundamentally for November 12 soybeans to trade as high as $2.30 over July 13 or did it reflect “Big Money’s” focus on owning November futures?)

Carries can develop in futures but they are not likely to be as generous as in recent years. This is a year to accept modest futures carries. December/March corn at 6-7¢ wouldn’t be attractive most years, but it may be generous this season, for example.

Where futures remain inverted and basis is strong, markets tell hedgers to liquidate ownership. Follow the signals. The next step is to sell Delayed Price inventor(ies) and go short the basis. This turns a futures inverse in your favor; your farm customers will price their DP bushels later at what will (hopefully) be a lower basis. For example: shorting the basis on DP soybeans at some location at a basis of +20Jan for November delivery is a much higher basis value when futures are steeply inverted. For example, on a recent day in harvest the Jan/March soybean inverse was 40¢ and Jan13/July13 was at a $1.36 inverse.

+20 Jan sale for November

= +60 March (40¢ Jan/March inverse)

= +156 July (136¢ Jan/July 13 inverse)

Selling soybeans equivalent to +156 July and having farmers price them in early summer looks like a good strategy. But elevators must protect the strategy; if you plan to sell DP soybeans due to the inverse, also lock in the inverse by buying the deferred futures month and selling the nearby. Then when you sell the cash soybeans (against Jan futures for example) and take January futures, the January futures position is offset and the long hedge is fixed in the deferred months. You could lock in the inverse(s) in portions using different spreads (Jan/March, Jan/May, etc), based on when you think producers are most likely to price.

Some firms are offering incentives to farmers to put soybeans on DP instead of storing their soybeans or putting them in farm bins. Such incentives could include no DP service charges for soybeans priced by August 31. Or the farmer might get a small premium over the elevator’s published bid on any soybeans priced after May 1, which is a subtle encouragement to farmers to hold off pricing.

Futures often retreat seasonally during harvest but watch potential credit needs closely. Prices are higher this year and for many firms, the value of their total inventories may be no more than 10% above last year at this point. But if price has to work even higher to ration demand, or if another crop problem arises in South America, your credit needs could escalate rapidly. Watch the signals.

Recognize that some traditional plays just won’t work in a crop year such as 2012. Feed mills and crushers, for example, can’t justify carrying owned-inventories of corn and soybeans from harvest until summer when corn or soybean futures are inverted, just to ensure having products you can offer for forward slots at traditional basis values. Doing things that make no economic sense is not the road to success. Instead, quote forward product basis as the market dictates – no matter how high the value is or how much the buyer may complain. You need to be compensated to take on the risks someone else is trying to eliminate.

Train-loading firms will face special challenges. Originating sufficient inventories will get tougher in many areas as the crop year progresses. Soybean exports will fall dramatically by spring and corn will slow as well. Local domestic markets are going to dominate much of the crop year, taking away freight advantages and putting small elevators on equal footing with sub-terminals.

Mike and Jason, along with elevator managers around the country, have a tough job this crop year. Credit demands will remain high, volatility raises the cost of mistakes, and it’s easy to get discouraged or to second-guess your plans. Your financial exposure is higher due to the risk that some weaker end-user/buyers could fail. Focus on the big picture: Rationing demand requires sustained high prices, atypical grain flows will occur, and opportunities may arise unexpectedly. The advantage goes to firms that can react quickly and are sufficiently capitalized to weather the storm. Follow the signals.

Sep 11, 2012

Meeting Your Information Needs

Welcome to our October/November issue! Thank you for investing time during this busy season to pick up, page through and read Feed & Grain magazine.

The Feed & Grain team works diligently to make sure the products we deliver meet your needs. For example, we've introduced new features to the magazine in response to your evolving needs and preferences, including our Digital Table of Contents (pg. 4) and our recurring Focus on Technology section.

Additionally, we are always updating and enhancing our website, www.FeedandGrain.com, to improve ease of use and offer more dynamic content. We developed a user friendly Online Buyers Guide (found in the navigation bar on our homepage), allowing you to search categories and find the products and services you need. We’ve also launched and continue to develop new e-newsletters, consistently providing you with more information.

These changes are part of the constant process we use to help make sure we remain relevant and important to you. Simply put, if we lose your attention — we lose.

Which is why we continue to evolve and improve our product offerings, particularly with digital technology. The "magic" of digital communication is that the more we learn about what you do and your information needs, the more targeted we can be in providing you with that information. It starts when you are gracious enough to provide us with your email address. So far, more than 1,000 of you have done so.

Please take a few minutes to register on www.FeedandGrain.com. Look for the REGISTER button at the top-center part of our home page, click it, then sign up for the e-newsletters and E-mail notifications that you’d like to receive. Help us continue to learn more about your information needs and how to meet them.

With all of the options you have for finding information, we want to make sure Feed & Grain stays at the top of your list. We appreciate your help in doing so!

Arlette Sambs

Editors note: For more than 30 years Arlette has been involved with Feed & Grain’s audience and advertisers, and worked with many of the associations supporting the feed and grain industry. She’s serious – please let her know what more we can and should do to meet your information needs.

Sep 6, 2012

Educating Tomorrows Managers

Where will we find our next generation of agribusiness managers? How can we make sure they have the preparation they need to be successful? What role should agribusiness play in answering these questions? As we look to the future, these are some pretty important questions that deserve some serious thought by everyone interested in the future of agriculture. Even though answering them won’t necessarily help a feed and grain firm in the short run, they are critical questions for the long-run health of the industry. In this article, we will focus on some ideas and strategies to insure the agribusiness management talent pipeline remains full of the kind of individuals the industry needs for a successful future.

The situation

Making sure we have young men and women preparing for the agricultural careers of the future will be no small task. USDA projects that between 2010 and 2015 there will be 54,400 jobs annually for individuals with a B.S. or higher degree in the agricultural sciences. Over that period, there will be about 29,300 annual graduates from agriculture, forestry/natural resources, and veterinary medicine programs. Another 24,200 graduates annually will come from allied disciplines such as business, communication, biological sciences, engineering and health sciences. So, over the next few years there will be about 1,000 more jobs annually for B.S. and higher graduates available than there are graduates to fill them. And while we don’t have the data, we regularly hear from our friends in the agricultural industry that there is a need for more graduates with associate or two-year degrees. So, as an industry, we have our work cut out for us simply to make sure we have the numbers of individuals we need before we say anything about how these individuals are prepared.

There are a couple of important implications here. First, we all must work together to help ensure that young men and women understand the exciting opportunities and the breadth of those opportunities in food and agriculture. Institutions such as the ones we work for use a variety of recruiting strategies to help get the word out and recruit young people to study food and agricultural disciplines. Future Farmers of America (FFA), 4-H, K-12 outreach programs, dual-credit courses, teacher education — you can find aggressive outreach/recruiting programs at places such as Purdue University and the University of Idaho, as well as most every other university with an agricultural college/unit. But we can only go so far and there is no question in our minds that hearing from industry can both reinforce the messages we convey and reach audiences we can’t reach. A number of strategies are possible for industry here:

1. Partner with your local university/community college. Take some time to meet the individuals responsible for recruiting at your local university/college. Find out how you can support what they are doing. Find out what groups they are targeting and how you can engage those groups. Consider, too, getting the word out to students/groups they are not pursuing, but that might have some interest in food and agriculture.

An idea that might be worth pursuing is to offer a combination scholarship/internship with your feed and grain business for promising college sophomores or juniors. Perhaps even take this a step further and offer an “ROTC” (Reserve Officer Training Corps — college programs offered by the military at colleges and universities to prepare future officers in the armed services, which pay students for their schooling and require employment with the military upon graduation) type program. Some businesses call these “co-op” type programs — several federal agencies offer plans such as these. While you may feel you are taking a bit of a risk offering a guarantee of employment with your firm to a college sophomore or junior — most of these students should have good indicators for employability even at this stage of their lives — grades, campus involvement, recommendations from professors, etc. Also, this approach allows you to start filling your employment pipeline early and to work with your selected student as they receive their education and become more mature.

2. Partner with your local FFA/4-H/high schools. We bet you already are deeply involved in these organizations. However, do you focus on promoting future career opportunities in the industry? What explicitly do you do to help students better understand where they might fit in your organization/in the industry? Through your involvement, how can you help students see a future in your firm/industry?

3. Partner with a “non-traditional” organization. What kind of talent do you need longer term? Do you need sales people and marketers, managers, nutritionists and crop consultants, or Commodity traders? What skills do these people need? Looking beyond traditional sources, where might you find them? Maybe you should be connecting with the local science fair, or the Future Business Leaders of America. Maybe you should be tapping the journalism club or the honor society. Clearly, we are not going to find all the talent we need from the traditional sources. How can you reach out to students who are interested in what we do, but just don’t yet know they can put those interests to work in the agricultural sciences?

Preparing the next generation

We won’t spend too much time on this point, but it may be useful for you to know a bit more about some of the ways colleges are working to help prepare students for industry careers, and what may have changed since you were a student. The classroom remains central of course, but there is a big push now for what are called “active learning strategies” or student-centered learning — getting students deeply involved and engaged in the learning process. In years gone by, the lecture by a professor was emblematic of a college education. Today, you are likely to find that lecture available via video for the student to view outside class so that class time is focused on discussion/case studies/application/lab work, etc. Our guess is that many students have had more team projects than they care to acknowledge, and writing and oral communication are stressed across curricula, not just in English or communications courses. Of course, not every student is better prepared than they once were in these areas, but the opportunities are there. At the University of Idaho, students majoring in agribusiness must take a “capstone” course in their senior year. In this class, they work with an agribusiness firm to tackle a management challenge facing that firm. They do background research and develop a plan to tackle the issue and present this to management at the conclusion of the course. Your feed or grain business might search out such opportunities to give you outside insight into a problem you are facing, as well as be introduced to potential employees.

Outside the classroom, there is a major push for experiential learning activities. Internships are promoted literally as soon as a student gets to campus. Study abroad opportunities have increased dramatically, as has student participation in these. Purdue now offers a leadership development certificate program where students work with a mentor to develop a personal leadership plan focused on self-leadership, interpersonal leadership, team leadership, and community leadership. This plan is executed outside the classroom through extra-curricular activities and other nontraditional learning opportunities. Undergraduate research and honors courses/programs are stressed more than ever before. Opportunities for developing leadership skills abound. Of course, any academic program worth its salt is going to be working on getting better all the time. That said, most of the programs we are familiar with have been working hard at doing an even better job of preparing the next generation of agribusiness managers. How students are being prepared is important as a feed and grain firm thinks about on-boarding a new employee.

Working with new hires

Talk with any manager very long about the “next generation” and in many cases the conversation will drift into general statements about the values and skills these new hires are bringing to the workplace. Statements such as “they don’t write as well as we did,” “they are not effective communicators,” “they don’t have the work ethic that we did,” are comments we hear frequently. In our experience, sometimes there is a bit of “the older I get, the better I was” attitude on the part of those individuals making the statements. If we are honest, looking back, some of those same statements were made about us when we graduated two or three decades ago! And it is easy to forget that when we were 21, we were not quite as focused as we are today — years of professional experience, family responsibilities, etc. tend to shape the way we look at the world.

That said, it is worth looking at how the values of the current generation may be different and what that might mean for preparing future managers. A couple of recent studies are worth a look and offer some pragmatic insight on differences in expectations between new college graduates in agriculture and food and agribusiness employers. The first study was done by the Agriculture Future of America (AFA) organization and can be found at www.agfuture.org/s/1342/images/editor_documents/about_us_documents/millennium_research_study.pdf.

The second, conducted by Michigan State University in cooperation with Association of Public and Land Grant Universities (APLU) and the University Industry Consortium (UIC), can be found at www.aplu.org/document.doc?id=3414.

Many of the themes of the two studies are the same, so we will focus on the AFA study. The study asks students and employers to rate a series of factors/characteristics/capabilities/ attitudes/values that could be related to career success. First, it is important to note that students and industry do see eye to eye on many areas that are important to career success. Issues such as work ethic, communication skills, time management, thinking through problems, oral presentation skills and business writing are rated similarly by students and industry. So, students see these as important to career success and industry agrees. Of course, it is possible that “work ethic” means one thing to a new college graduate and something different to a seasoned industry professional. That said, we do know that students and industry rate this factor in a similar way, even if they might define it differently.

However, in some cases, students see certain factors as more important than industry does: hands-on agricultural experience, networking, accounting skills, high GPA, graduating from a well-respected university and knowledge of global market cultures were all rated higher by students than by industry.

Some of this likely comes from what faculty like us tell our students is important. We do tell students to keep their grades up, because we do find that grades matter — past performance is an indicator of future success. And we have some employers who will not interview students who do not meet minimum GPA standards. Likewise, we emphasize the growth process that an international experience can support. We find that studying abroad can affect a student in a variety of ways. They will likely better understand why culture matters in personal and professional interactions. Students generally gain another measure of maturity after having to navigate another country. They tend to come back with a greater appreciation for global affairs. While many domestic food and agribusiness firms may not require or need a student with a global experience, we feel most all employers benefit from students who have studied abroad. We also push internships and the hands-on agricultural experiences these generate. And we promote the importance of these experiences to students — internships are like “dating before you get married” — each side checking the other out with no promise of a long-term commitment. Maybe industry looks at this as a table stakes experience, but we believe that it would be a big mistake for us to stop promoting such hands-on experiences for our students.

So what does industry see more important than students? Attributes such as a sense of urgency, being a quick study, being results focused, intelligence and excellent computer skills were all rated more important by industry compared to students. We will focus on the first three — most students are very computer savvy today, so it is not surprising students rated this lower than employers. And intelligence is something we can build on, as well as working to attract bright individuals to the industry. But, both the AFA and the MSU/APLU/UIC studies show a bit of disconnect between students and industry on what we might call “the pace of business.”

This is an important issue and one that agribusiness mangers should be sensitive to also. In general, these studies suggest that new hires are pretty dialed in to what is important. But, they may need some coaching to help them understand the importance of self-starting, of generating results, of getting things done … today. Managers who understand this disconnect, and who work to bring new hires along on these areas, will likely lower frustration levels (for both parties) and will likely increase the likelihood of a successful hire. Ideas here include careful communication of expectations with respect to effort/projects/delivery, mentoring/job shadowing so that the new hire experiences the expectations first hand, and quick follow-up when a new employee is not delivering. On the last point, it is important that the employer recognize this failure to deliver as “not knowing” as opposed to “not caring” in many cases.

Some final points

Back in February, Yahoo! Education ran a post on College Majors that are “Useless,” and Agriculture was “Useless Degree” No. 1! Of course, we could not disagree more strongly — we are very bullish on the future of the food and agricultural industries and the future for agricultural graduates. That said, the Yahoo! posting was a vivid reminder of the momentum we have to overcome to help students understand the opportunities that agriculture can offer. Reaching out to nontraditional sources of talent means we will need to help those students overcome some stereotypes about our industry.

In addition, reaching out to nontraditional student pools means we will need to help them understand agriculture in ways that we currently don’t when students come from the proverbial “farm background.” Grounding a student/new employee in the basics of agronomy or livestock production or grain markets will likely be more important as we look to the future.

Finally — and this is likely a future Manager’s Notebook column topic — is the role social media plays in attracting, retaining, educating and leading new employees. Our next generation of managers has grown up in a social media world. They come with an amazing ability to connect through these social media tools. How do we use those tools most effectively? How can the next generation put those skills to work in our food and agribusiness firms? There are clearly questions that agribusiness managers should be asking.

Providing food, feed, fiber, and fuel for 9 billion people by the year 2050 is going to take an exceptional pool of human capital. We think we speak for all of our colleagues at US colleges and universities in saying we look forward to working with industry to make sure that pool of talent is available and prepared for the challenge.

Sep 4, 2012

Why Least Cost Is the Best Value

Traditional animal feed formulation is premised on finding the lowest-cost ration that obtains the desired level of performance. Increasingly, computer software programs that formulate animal feed employ what is often referred to as a “least cost” formulation system. This has been the case for quite some time. To the average person engaged in the animal feed industry, least cost formulation is not controversial. But to those unfamiliar with production agriculture, least cost formulation may require some explanation.

Before delving too deeply into this subject, let’s first get our terminology defined. By “least cost,” we mean computer formulation software that will choose the lowest cost solution to satisfy a particular nutrient profile needed by the animals in question to support commercially viable weight gain or milk production. Least cost does not mean buying the least expensive ingredient available. In fact, good least-cost formulation systems will often choose a more expensive ingredient that more than makes up for its higher price by having greater nutritional value than a less expensive ingredient. Thus, this technology may be better expressed as a “best value” system.

In this era of high and volatile feed prices and thin margins, it is more important than ever for producers and their suppliers and vendors to employ efficient strategies. Least-cost formulation programs have helped producers improve efficiency and profitability by not overpaying for feed, or feeding a more expensive ration than necessary to achieve the desired level of production. In today’s marketplace, a producer not using least-cost formulation is putting itself at a significant competitive disadvantage.

Despite this commercial reality, the potential negative connotation some people associate with the least-cost concept contributes to the risk of disputes and lawsuits by farmers claiming product liability and allegedly negligent nutrition services. As is often the case, what is straightforward in the office and laboratory may not be as clear-cut in a courtroom, where a handful of jurors decide disputes that may have significant impacts on the parties’ bottom lines. To at least some of those potential jurors, feed ingredients pulled through a least-cost system may sound like “cheap” or “inferior” ingredients, and your company and its counsel could face an uphill battle convincing them otherwise. Fortunately, there are steps companies can take to reduce such risk.

Require reliable inputs and document them

A vigorous defense of a least-cost formulation system will rely on the science behind the assumptions and algorithms being used in the program. To use a crude example, if your company’s dairy formulation tool assumes a higher amount of methionine in soybean meal than do competitors’ systems, that distinction must be based on sound science. Otherwise, the system will tend to underfeed methionine and the nutrition the animals receive will be less than optimal.

Almost as important as sound science for product liability purposes is the need to document that sound science. You should be able to provide your counsel the documentation that will permit counsel to explain how the best available research supports the assumptions made in the program. While this science may not be enough by itself to win your case, without it your company is likely to lose.

Study and track performance

If your company’s formulation system works to provide good feed to your customers at a good price, jurors might expect your company to have evidence supporting that assertion. Such evidence might include, for example, a study comparing performance and price of a least cost system with a system in which decisions are made without regard to price. Such evidence might also include “testimonials” from satisfied customers who are willing to praise your company’s system and credit it for positive results achieved on their farms. Happy customers can create powerful evidence that your system works and may lead an objective observer to conclude that a customer allegedly experiencing poor results may be merely making excuses.

Because agricultural producers are typically reluctant to get involved in litigation to which they are not a party, particularly when to do so they will have to take sides against another producer, the task of identifying satisfied customers should take place before a claim is brought against your company. Having already made a public commitment to support your company’s system, such customers are more likely to follow through with a willingness to repeat that opinion in the context of litigation.

Stay flexible

Your company’s formulation system should allow your formulation employees to override the system’s recommendations, whether for reasons of customer preference, palatability or pelletability (where applicable). This is not only a good business approach but also a good legal approach. Such flexibility will help demonstrate that your company was looking out for its customers and empowering its employees to make individual decisions instead of relying purely on a computer.

Communicate with customers

If your company’s customers understand, even in very general terms, the formulation system your company is employing, they will be less likely to sue and claim surprise that least-cost formulation was being used. Open communication tends to make customers feel like trusted partners. While not removing the economic pressures today’s livestock producers are under, customers who feel a sense of partnership with your company and believe it has been open and forthcoming with them are less likely to sue than those who do not feel this way.

Similar to the point above about sound science, here too, documentation is important. Of course, the “gold standard” would be a written acknowledgement of least-cost formulation signed by the producer. For many reasons, a signed acknowledgement may not be realistic, but short of that there are still steps your company can take to improve its position in any subsequent litigation. Such steps can include promotional materials in writing and/or on the company website, and training manuals to help your company’s employees communicate with customers. If these materials suggest a dialogue with customers about ingredient choices being made for economic reasons, your company will appear more credible when asking a jury to conclude that the producer already knew about the system and is now just pointing fingers and seeking a windfall.

Jul 17, 2012

Lessons Learned

I’m never going fishing again — costs me too much money.” Mike tosses his fishing cap onto the file cabinet and turns to Jason, his youngest son and newest employee. “Now tell me again, what happened the past two weeks? How did the U.S. corn yield drop from 166 to 146? I go where there’s no Internet and no cell phone service and 12% of the corn crop vanishes before they even do field surveys? And you say it’s getting worse?”

Jason runs his hand through his hair and hands Mike a printout: “Well, corn was already up over a dollar when you left for Canada on July 1. But the 100-degree heat just didn’t break, and the drought kept spreading. Look at this new report out yesterday from NOAA — the Drought of 2012 was already in the Top 10 of the last 117 years as of the end of June, and last night’s crop ratings on corn fell hard for the sixth week – 8 of 18 listed states now show corn rated at least 50% poor or very poor. It’s really bad out there. Now some research folks are talking about a yield of less than 140 bushels per acre!”

Mike just stares at Jason in shock. “But it was great in Canada — cool and wet the whole time. Jason, still a little rough in the subtleties of dealing with managers, replies, “Yeah, but we’re not in Canada….”

So Mr. College Graduate, let’s map out a game plan for managing this elevator. How are we going to make money? I see the futures carries are completely gone on corn and soybeans. And December corn futures are almost to $8 and we have a lot of corn bought below $6. So those margin calls have chewed through $2 per bushel of our credit line, plus the cash flow for the soybean hedges.”

Well,” Jason starts, “I had orders in to set the Dec/March, Dec/May, and Dec/July corn spreads but we didn’t get anything filled. All our short corn hedges are still in Dec 12 futures.” He holds his breath and waits for Mike to chew him out, but to Jason’s surprise, Mike replies softly, “I know you’re kicking yourself — same thing happened to me in 1988. The drought took hold that summer, and before I knew it futures had shot up and the Dec 88/July89 corn spread had gone to an inverse. I still remember what I learned from your Granddad that summer — first, don’t panic. Second, lay out a plan; get rid of the risks you can’t afford, and pay attention to market signals.”

Mike pulls a legal pad to the center of his desk and starts three sections: 2012 Factors, 1988 Revisted and Action Plan. He listens to Jason recap what’s been going on in other markets and starts listing some factors:

  • Gross ethanol margins have fallen hard, to negative territory; almost $1.50/bushel below the fall of ’11 (excluding basis, the value of DDGs and other co-products).
  • Ethanol production is already slowing.
  • The hog/corn ratio is nearly as low as it’s been in years.
  • Feeder cattle prices are down 15% to 10 month lows as more calves are moving to market. Fat cattle prices are stable for now.
  • Egg and chick placements are down.
  • Export basis on corn has dropped off 30¢ since mid-June but is still fairly strong for new-crop.
  • We already have three messages from buyers looking for new-crop basis offers on corn, for fall out into Spring 2013.
  • The forecast for the next ten days points to more deterioration in crops.
  • A lot of farm and commercial bin space has been built the past two years. Too much?

Next Mike thinks back to 1988 but wonders whether that’s a smart thing to do. A lot has changed since 1988 but it doesn’t hurt to at least think about it.

  • There were only a few ethanol plants in the country; corn moved to terminals or for export, or stayed local for feed.
  • Surprisingly, corn basis in the fall of ‘88 was neither especially high nor low.
  • The Dec88/Jly corn spread was inverted before harvest but widened back to a 15¢ carry by fall.
  • The 1988 drought cut the corn yield by 30%, but there were 4.3 billion bushels of corn on hand on Sept 1, 1988; 2 billion was Farmer Reserve corn and CCC inventory. That left 2.3B bushels of ‘free stocks’ on hand that USDA had sold out of CCC inventory, and farmers had redeemed from the Reserve.

Mike turns to Jason, “Now for the tough part. We need to list specific things we need to do — and when to do them.” After some debate they have their preliminary Action Plan:

  • Review all open farm purchases. Then talk with the farmers about crop insurance coverage — that indemnity can help offset the cost of cancelling contracts.
  • Meet with the banker; she needs to know our game plan. Run “what if” scenarios and identify dollar needs if corn should go to $10 or soybeans to $20. Remember that futures Initial Margins will also likely rise.
  • Put in “good until canceled” orders to set corn and soybean carries at reasonable objectives — just in case. Otherwise hedges stay in Dec corn and Nov soybeans — for now.
  • New-crop export soybean basis is near record highs. Look to make some harvest sales to reduce overall basis risk.
  • Widen our new-crop bids/margins. Calculate how much corn and soybeans we can ship by December 1. Anything we buy over that has to be priced to allow for the cost of the inverse(s) plus interest past December. Don’t raise bids to ‘chase’ bushels at this point!
  • Check on buying Dec12/July13 corn “Calendar Spread Options.” Buying Puts would give us a way to gain if the carry returns; buying calls would make money if the spread inverts further.
  • Be careful about forward sales over extended periods to any single buyer. The ethanol and livestock sectors will be going through some lean months and accounts-receivable could become an issue for us.
  • Work on how we’ll fill our space. Jason can estimate local production and ‘market share.’ Consider very cheap DP, or even free Delayed Pricing. We’ll get title and the farmer can price the grain later. If farmers are still bullish at harvest this could be attractive to them.
  • Review discount schedules. “% of Price” schedules can get very expensive.
  • DO NOT buy forward year grain against 2012 crop year futures. That bankrupted a lot of farmers and some elevators in 1996. Research the history for Jason to read.

Mike closes the office door and turns to Jason, “We don’t know yet what we’ll face, or how small the crops may be. But we’ll get through this. We will have to work a little harder and think a little more. Today’s Action Plan is our starting point, not the end game. Remember Granddad’s words: Don’t panic; learn to respect market signals. We can earn storage revenue, or if farmers are heavy sellers at harvest then basis should break back or futures carries should return. Somebody will have to be paid to hold grain the market doesn’t need at harvest. If farmers don’t sell and basis skyrockets at harvest, we can consider selling DP inventory and buying it later. Just fasten your seat belt, Jason; this is a year you’ll never forget.”

Jul 2, 2012

Building a Safety Culture

In general, feed and grain companies conduct operations in a way that promotes “production first and safety second”. Even the notion of putting “safety first” does not by itself promote a safe workplace. Safety is an attitude and should not be thought of as “first" or "second,” but should be integrated into all thought processes throughout a business.

Undoubtedly, the most influential source of a company’s safety culture is the front line supervisor or location manager due to their daily contact with employees. However, the people who move to the position of manager are often promoted due to their successful operational work, and technical proficiency is not always indicative of individuals who can successfully manage people. So, when location managers need help creating a positive safety culture, upper management can help:

  1. Provide a company-wide, integrated safety management system. According to safety expert Chris Goulart, “No single tactic, employed on its own, has ever been developed that clearly produces the highest level of sustained achievement. Complete alignment of all organizational activities within a clear vision of continuous safety improvement that is based on the full engagement of everyone is necessary to develop a sustainable safety culture.”
  2. Provide a formalized means for employees to discuss near misses or hazards and to remediate these risks before an accident or incident occur.
  3. Develop a method of tracking and measuring process-oriented “leading indicators” rather than continuing to use the traditional method of “lagging indicators” (items that measure failure by looking at bad situations that have already happened).
  4. Develop company policies and procedures for standard safety-related work practices.
  5. Educate managers on how positive interactions foster an honest and heartfelt desire by the workforce to be involved in the safety process.

What can a location manager do immediately to foster a positive and powerful safety culture at their location?

  1. Lead by example. Have available and use personal protective equipment at all times. Use the guards on equipment (e.g. Use the guard on a bench grinder and wear eye protection).
  2. Conduct daily job meetings. Talk about what everyone is doing for the day and any precautions for the job (i.e. Before loading a train; before cleaning a bin). Do not wait for scheduled company safety training for employees.
  3. Encourage employees to discuss daily tasks, equipment or tools they might need to do their job safely, and talk about near misses.
  4. Encourage the use of lists or permits which facilitate “thinking the job through”. Do not encourage employees to skip critical steps in order to “get the job done”.

The location manager plays a key role in safety through their daily interactions with employees. When a manager leads by example, actively engages employees, identifies and fixes near misses, and creates a model of safety based on accomplishment, then a strong location safety culture is an assured outcome.

Jun 26, 2012

Leading Change in Your Feed and Grain Business

John F. Kennedy said, Change is the law of life and those who look only to the past or present are certain to miss the future. Think about that. How does this outlook fit with your feed and grain business? What changes might you need to make to keep your business competitive or on-track for the future? It is an understatement to say that in the past 100 years (even in the last 20!), we have experienced dramatic changes in production, technology, world trade, economics, and government policies. The feed and grain industry has been impacted by all of these.

Jun 15, 2012

When OSHA Comes Knockin

As Alexander Graham Bell famously said, “before anything else, preparation is the key to success.” No truer words could be said to employers in the grain industry today about OSHA inspections. Secretary of Labor, Hilda Solis, summed up OSHA’s enforcement philosophy during her swearing in, when she stated: “There is a new sheriff in town. Make no mistake about it, the Department of Labor is back in the enforcement business. We’re serious. We’re very serious.” OSHA has certainly lived up to that tough talk.

Through increased penalties, inconsistent and confusing interpretations of grain-related regulations, aggressive special emphasis enforcement programs, inflammatory press releases, and criminal referrals to the Department of Justice, OSHA has hit the grain industry particularly hard. Accordingly, OSHA’s current enforcement philosophy makes the consequences of being unprepared for an OSHA inspection direr than ever before. To help grain handlers avoid those dire consequences, this article reviews:

(1) Steps grain handlers can take now to prepare for an unexpected visit from OSHA;

(2) Employers’ rights during an OSHA inspection;

(3) Step-by-step analysis of the stages of OSHA inspections; and

(4) Strategies for managing an inspection to best avoid a significant enforcement action or position the company for a successful challenge of citations.

Why prepare for an OSHA inspection

Over the past three years, the Department of Labor’s budget has funded a substantial increase in the size of OSHA’s enforcement team, and required OSHA to redirect many of its compliance assistance resources into enforcement. OSHA also re-wrote its penalty policies to increase the size of enforcement actions, introduced new forms of punishment, and launched new special emphasis programs that have greatly impacted the grain industry. These changes have more than doubled the frequency of significant cases (citations with fines more than $100,000), and have made it much easier for employers to be penalized as Willful or Repeat offenders.

Historically, OSHA found fewer Willful/Repeat violations because it treated workplaces within a corporate family as individual, independent establishments, limited review of employers’ OSHA records for prior citations to three years, and took a reactive approach to selecting inspection targets, making a follow-up visit to the workplace and Repeat violations less likely. Now, OSHA treats workplaces within a corporate family as one workplace, looks back five years in an employer’s OSHA record for past citations to serve as the basis for Repeat citations, and takes a proactive approach, often specifically selecting past violators as inspection targets. OSHA also sent letters to thousands of grain employers in 2010 and 2011 informing them of their responsibilities related to grain bin entries. OSHA has treated all employers who received these letters as being “on notice,” setting the stage for OSHA to issue Willful violations if employers disregarded the obligations outlined in the letters.

OSHA has also increased its use of National and Local Emphasis Programs to target the grain industry. These programs allow OSHA to randomly choose any employer in the grain industry for inspection without the need for an incident or employee complaint to create probable cause to inspect. For example, OSHA has instituted a Local Emphasis Program for Grain Handling in 5 different OSHA Regions (covering all of the major U.S. grain states). These inspection programs direct substantial inspection resources to grain elevators, looking for violations of OSHA bin entry requirements, housekeeping and combustible dust issues, preventive maintenance deficiencies, training, and other grain related hazards. Under these emphasis programs since 2009, OSHA has visited approximately 9,000 grain elevator facilities for enforcement inspections, almost all of which resulted in at least one alleged violation, and more than 3,500 total violations with untold millions in total penalties.

How to prepare for an OSHA inspection

One of the most important tools in preparing for an OSHA inspection is to understand the rights of the respective participants in the inspection process. These rights are defined by the U.S. Constitution, the OSH Act, and the Administrative Procedure Act. The employer must consider three different sets of rights developed by the aforementioned laws: OSHA’s rights, employees’ rights, and the employer’s rights.

OSHA has the right to…

  • Inspect workplaces with probable cause;
  • Conduct inspections without advance notice;
  • Access employer records;
  • Collect physical evidence, including photographs, video recordings, air and noise samples, etc., during the inspection; and
  • Conduct employee interviews.

Employees have the right to…

  • File a complaint with OSHA;
  • Not be retaliated or discriminated against for filing a complaint or for participating in an inspection;
  • Participate or be represented in the Opening Conference, the Walkaround, private interviews with OSHA, the Closing Conference, and an informal settlement conference;
  • Choose whomever or no one to be an interview representative; and
  • Access inspection related records.

Employers have the right to…

  • A “reasonable inspection” at a “reasonable time” in a “reasonable manner,” according to Section 8 of the OSH Act;
  • Demand a warrant;
  • An Opening Conference;
  • A copy of a formal employee complaint;
  • Accompany OSHA during the Walkaround at the workplace;
  • Participate in management employee interviews;
  • Protect Trade Secrets/confidential business information from public disclosure;
  • A closing conference; and
  • Challenge any citation.

Knowledge, planning improve outcomes

Transition

Be Familiar with OSHA Directives

The employer should get familiar with Directives affecting the inspection process for the applicable special emphasis enforcement programs to better understand what the Compliance Safety and Health Officer (CSHO) is looking for during inspections. The employer should also review OSHA’s Field Operations Manual, available at http://www.osha.gov/OshDoc/ Directive_pdf /CPL_02-00-148.pdf, to better understand the inspection process.

Implement and Audit Safety and Health Programs

Grain employers should implement a comprehensive safety program, and conduct internal or third party audits of work places and programs. Audits may be used to demonstrate good-faith efforts to address hazards, precluding a charge of willful violation. The failure to address recommendations identified in an audit, however, could be used as support for a willful violation by demonstrating knowledge of a hazard and a “reckless disregard” or “plain indifference” to it. To avoid that risk, employers should carefully review prior audits and make certain to address all recommendations. A response document that clearly shows how each audit finding was addressed should accompany each audit. The employer should also consider conducting audits with the help of an attorney, thereby protecting the audit findings and recommendations from OSHA under attorney-client privilege.

Establish an Inspection Team

Before an inspection, employers should designate an inspection team, and train that team in what steps to take during an inspection. Positions on the team should include:

  • Principal Spokesperson;
  • Union/Contractor Liaison;
  • Photographer;
  • Document Production Coordinator;
  • Walkaround Representative; and
  • Interview Representative.

One person can cover several of these positions. Once the employer designates these positions, it must train the inspection team in who to contact when OSHA arrives; inspection rights; relevant OSHA standards; and how to control access to and the flow of information during an inspection. The employer should also equip its inspection team with a camera/video camera, a contact list, sampling tools, a document control log, a copy of OSHA’s Field Operations Manual, and document labels.

Employers should designate inspection routes based on the particular area of the worksite to be inspected - always use the most direct route or the route that avoids sensitive areas of the work place, even if that means walking around the outside of the building. After thinking about the best inspection routes, employers should audit the routes and correct any hazards in plain view from those areas.

Determine Warrant/Consent Philosophy

OSHA inspections only proceed with consent from the employer or an inspection warrant. The 4th Amendment to the U.S. Constitution requires that a Judge issue a warrant only upon a showing of probable cause, but OSHA has had little difficulty meeting the reduced administrative probable cause standard. Though the employer has the right to demand OSHA produce a warrant to inspect, consenting to an inspection is usually the better course. Generally, demanding a warrant benefits the employer only in that it provides the employer some extra time (a day or two) to better prepare for the inspection, but an employer also faces potential retaliation for demanding the warrant. Through consent, the employer risks a broader search than the Judge might have authorized, but gains the appearance of cooperation, which fosters a better position to negotiate over the scope of the inspection, and manage the inspection to minimize business interruption. Generally, an employer should waive the warrant requirement and consent to the inspection, but only after negotiating an acceptable scope and satisfactory conditions.

Stages of an OSHA inspection

An OSHA inspection consists generally of six stages: (1) opening conference; (2) Document Production; (3) walkaround inspection; (4) employee interviews; (5) closing conference; and (6) citations issued and contested. Each stage of the inspection affords the employer a chance to control its exposure to OSHA violations. In abiding by the advice provided below, the employer reduces the probability of a citation or at least enhances its ability to contest and moderate citations.

1. Opening Conference

Though all stages of an OSHA inspection are important, the Opening Conference provides the employer the best opportunity to limit the scope and duration of the inspection. The inspection begins when the CSHO arrives and displays his credentials. If the CSHO does not readily offer his credentials, the employer should ask to see them. Employers should insist that an opening conference take place if the CSHO attempts to skip this stage. The CSHO should begin the conference by explaining the intended purpose, scope and duration of the inspection, and identifying the impetus for choosing to inspect this work place; i.e., LEP/NEP, accident, employee complaint, etc. The employer should ask about the purpose and scope of the inspection if the CSHO does not volunteer that information.

The employer should also address the warrant issue depending on the CSHO’s willingness to negotiate the scope. Consent is preferable where the CSHO is willing to discuss the matter and come to a mutually-agreeable scope of inspection. The employer should know in advance who will participate in the opening conference and designate a location for the conference, employee interviews, and a work space for OSHA if the inspection will continue for multiple days. Finally, establish document request and interview protocols during the Opening Conference. Specifically, request the CSHO provide document requests in writing and schedule interviews in advance to avoid business disruption.

2. Document Production

The CSHO will also request documents and information from the employer throughout the inspection. The employer should insist on written requests for all documents (except the 300 Logs/300A Forms, because the law requires the production of these records within four hours). A written request allows the employer to analyze the request for objections, gives the employer more time to respond to the CSHO’s requests, and permits the employer to track the requests and the documents produced. It also allows the employer to more carefully parse the words of the request, and provide only the records requested, and no more.

The employer should review all requested documents for responsiveness, privilege, and trade secret or confidential business information, and designate information that must be maintained as confidential. The employer should make sure that OSHA understands all relevant facts, but should not generate records to respond to a document request. During the inspection, it is imperative to remove documents from plain sight, which includes any information displayed on a whiteboard or binders in an area to be used for OSHA interviews or the CSHO’s work space. Finally, keep a duplicate set of all documents produced to OSHA, and maintain a Document Control Log to track the status of the document production.

3. Walkaround Inspection

A management representative should accompany the CSHO at all times during the walkaround inspection. The CSHO should be escorted at all times to ensure that he abides by all company safety rules, to control the flow of information, to gather intel on the focus of the inspection, and to ensure the areas visited during the walkaround are strictly limited to the agreed upon scope of the inspection. The CSHO may take photos, video recordings, samples, identify hazards and make suggestions. The employer representative should take detailed notes of the CSHO’s actions, and mimic those actions to ensure the employer has the same data. Have a camera ready and take side-by-side pictures or video. Ask for advance notice prior to any sampling, and fix any hazards identified as soon as possible, but do not admit to violations. If the inspection will last more than one day, request a brief meeting at the end of each day to ask about concerns, interview intentions, and tasks for the next visit. Be cordial and professional, but also protect your rights.

4. Employee Interviews

OSHA will interview both hourly employees and management represents during the inspection. Arrange all interviews according to the interview procedure developed during the Opening Conference, and conduct them off the work floor in a pre-selected location. The employer should object to impromptu, on-the-floor interviews lasting more than a couple of minutes as an undue hindrance to production; the employer can request an alternative time and place based on the requirement that OSHA must be “reasonable” in its interview demands. The OSH Act gives OSHA the power to issue investigative subpoenas. Therefore, the employer and its employees should find a balance of asserting rights but not driving OSHA to pursue a subpoena.

An employer representative may participate in any interview, but only has the right to participate in management interviews, because all knowledge of a supervisor is imputed to the company. An hourly employee may request that the employer’s attorney be present during his interview, but the employer must not intimidate or coerce the employee into requesting this. Do not discriminate against any employee for agreeing to be interviewed, for interviewing with OSHA privately, or for anything he says to OSHA.

Employers should prepare all witnesses for OSHA interviews by explaining the rights of the witness and providing interview tips. For example, the witness has the right not to be recorded or to sign anything, and should only answer the question asked. “I don’t know” and “I don’t remember” are perfectly acceptable answers.

5. Closing Conference

A closing conference takes place at the end of inspection, which may be weeks after the on-site portion of the inspection. The CSHO will explain the employer’s post-citation rights, and communicate any findings such as the standards allegedly violated, the bases for alleged violations, and possibly abatement and abatement dates. Employer should listen carefully and take notes. The CSHO will likely not share the classification of violations or the penalty amounts, but an employer may inquire about that information. At this stage, employers can correct any errors or misimpressions of the CSHO, but should not argue. Employers should also provide details of any alleged violations that have already been corrected, but again, avoid any admissions or promises, and ask for time to offer supplemental information before any citations are issued.

6. Citations Issued and Contested

According to Section 9(c) of the OSH Act, OSHA has six months to complete its investigation, draft reports, and issue citations. After an employer receives a citation, it has several options: (1) accept the citation and pay the fine (almost never the best option); (2) request a variance (almost never available); (3) resolve citations at an informal settlement conference with OSHA (more difficult now because the national OSHA office has limited the flexibility of Area Offices); (4) file a notice of contest with OSHA and negotiate a formal settlement with the Office of the Solicitor of Labor (generally the best option); or (5) contest the citation and proceed to a hearing before an administrative law judge with the Review Commission. The employer should consider several questions in deciding to contest a citation. For example:

  • Are the citations accurate?
  • Will the citations potentially expose the employer to Repeat violations?
  • Are the proposed penalties appropriate?

Because of OSHA’s assault on the grain industry, employers today need to prepare for inspections, protect their inspection rights, and manage the flow of information during inspections. Through preparation, grain handlers will be ready to properly manage an OSHA inspection and any consequences that result. Following the steps provided here will provide employers in the grain industry the necessary tools to avoid significant enforcement actions, and put them in an advantageous position from which to challenge possible violations.

For more information about OSHA issues, visit Epstein Becker & Green’s OSHA Law Update Blog at www.oshalawupdate.com.

May 8, 2012

Nonconformity With Delivery Obligations Under NGFA Trade Rules

As anyone involved in the grain or feed ingredient business knows, managing the flow of commodities between producers, handlers and end users requires constant attention to ensure that the timing and quality of commodity deliveries meets customer expectations. Market volatility, thin margins, high working capital requirements, and constant efforts to reduce transaction costs translate into a system in which a single failed delivery can have devastating impacts on overall profitability. Properly managing these breakdowns can spell the difference between a bump in the road and a sizeable financial blow.

Types of Failures

In plain terms, the failure of a party to perform its obligations in accordance with a contract is a breach. Quality and timing issues are likely two of the most common problems that cause breaches to arise in grain and feed ingredient transactions. As in much of agriculture, market participants are often at the mercy of Mother Nature. Quality issues arising in the field, such as aflatoxin contamination or grain going out of condition while in storage or in transit can be compounded as truckloads are commingled to become unit trains or eventually barges. As the volume of batches or lots increase, so do transportation costs and the challenge and expense of locating replacement deliveries. Timing issues can wreak just as much havoc on both buyers and sellers, especially when receiving parties are short on inventory or have immediate plans to remarket the products to another buyer. Often these can result from harvest delays, weather challenges, rail and maritime transportation delays or the like.

Breach by Sellers or Buyers Under NGFA Grain Trade Rule 28

The Grain Trade Rules of the National Grain and Feed Association (NGFA) govern a large percentage of grain and feed ingredient contracts. NGFA Grain Trade Rule 28 sets forth specific provisions that govern non-performance by Buyers and Sellers. Part 28(A) (titled “Seller’s Non-Performance”) imposes a duty on a breaching Seller to provide notice to the Buyer upon learning they cannot perform in accordance with the contract:

“If the Seller finds that he will not be able to complete a contract within the contract specifications, it shall be his duty at once to give notice of such fact to the Buyer by telephone and confirmed in writing. The Buyer shall then, at once elect to:

(1) agree with the Seller upon an extension of the contract; or
(2) buy-in for the account of the Seller using due diligence, the defaulted portion of the contract; or (3) cancel the defaulted portion of the contract at fair market value based on the close of the market the next business day.”

This provision and others like it promotes a breaching party to inform its counterparty of the issue, and forces the non-breaching party to quickly elect how it plans to handle the problem. The goal of the forced election to agree to extend, buy-in or cancel at market is to help avoid situations where tough decisions aren’t timely made, which can cause the unresolved issues to languish, subjecting both parties to undue burden and expense. Shortly after the notice is given, damages or cancellation charges can become a known quantity, hopefully avoiding a situation where a train or barge sets idle while the parties decide how to resolve the nonconformity.

If the breaching Seller fails to give notice that it will be unable to perform in accordance with the contract, that Seller remains at the mercy of the market until the contract is either performed or the Buyer becomes aware that the Seller will be unable to perform. Depending on the length of the contract, several months can elapse before a Buyer learns that his/her seller cannot perform. During that time, since the Seller did not give notice, the Seller is subject to adverse market price movements that can drastically increase the measure of damages. Once the buyer learns of the seller’s inability to perform (which in legal terms is considered a repudiation, or a breach before the obligation is due), a duty arises on the part of the Buyer to elect one of the same three remedies: extend, buy-in or cancel.

Breaches by buyers operate similarly, and the corresponding Grain Trade Rule 28(B) (titled “Buyer’s Non-Performance”) mirrors 28(A).

Communicating the Election and Avoiding Mixed Signals

Once a decision is made to declare a breach and choose a remedy under Rule 28, it is important that a non-breaching party’s words and actions proceed in accordance with that remedy, and doesn’t confuse them with other remedies. In other words, after giving notice of a breach and an election to cancel a contract at market value; a party should avoid discussions or communications that that party may agree to accept a later, damaged, or otherwise nonconforming delivery. Occasionally, a party will send correspondence intending to declare a breach and cancelling a contract at the close of the next day’s market; shortly followed by another email seeking confirmation from the other party as to whether a cancellation is acceptable. These types of discussions, often over email, look less like elections of contract remedies, and more like invitations to bargain. In other words, actions that convey uncertainty following a “declaration” can undo any positive effects the declaration had. It is often advisable to determine the best response, make the declaration, and stick with it.

Acceptance of non-conformity, such as agreeing to load a late vessel or agreeing to a discount schedule in order to account for damaged grain, may extinguish the legal claims related to the failed performance. Acceptance “under protest,” such as when a party declares it will “unload the train and seek damages for nonperformance later” has limited effectiveness here, absent an agreement by the parties that they will truly take up their issues later, because Grain Trade Rule 28 doesn’t allow a combination of remedies. Further, attempts to tack on extra damages following delivery and payment are rarely enforced. Such efforts may be considered to be unilateral modifications of contract terms, which are prohibited by most contracts — one party cannot change the pricing term after the fact.

Having a Plan in Place

The best approach to managing a counterparty’s less-than-stellar performance of a contract obligation depends greatly on your position in the trade and the type of nonperformance. Regardless of which side of a default you are on, the most valuable asset in managing default is flexibility. Being able to quickly divert nonconforming grain to an alternate market, or to quickly procure replacement grain from a trusted source can help to avoid costly re-routing of trains, trucks and barges.

As complications arise, it is advisable to involve your legal counsel in discussions at an early stage. The decisions you make upon learning of the breach may thwart your later efforts to collect damages for another party’s failure to comply with a contract, or may bind you to damages if you are the breaching party. Strategic advice from counsel may also help address situations where a non-breaching counterparty overreaches or seeks to gain an undue advantage as a result of the nonconformity.

May 8, 2012

Risk Management Goes to Grad School

Before 1848 farmers brought wagons of grain to Chicago and took the price a buyer offered or returned home. Some opted to dump their grain in the Lake when prices got too cheap. The system was easy, but not very useful. The 1848 launch of the CBOT introduced forward cash prices, which evolved over the years into standardized ag futures contracts at Chicago, Kansas City and Minneapolis. Managing risk became more complex but the results were worth the effort for farmers, as well as for buyers that needed grain throughout the year. The first formal clearing system was established by the CBOT in 1883 to further improve efficiency and ease of entry and exit with futures.

Not a lot changed out in the country until well into the 20th Century. Elevator managers bought cash grain, sold futures between 9:30 and 1:15 p.m., and sometimes pre-hedged on the close against expected afternoon purchases. Buyers took 'protection' if bearish news came out in the afternoon by lowering their cash price against a lower opening on futures the next morning.

Then options on ag futures were launched in 1985, paving the way for greater pricing flexibility, especially for farmers. The risk-management universe was slowly expanding and becoming more challenging. By the mid 1990'sserial options joined the mix. These are short-term options for which there is no underlying futures month, and offer the advantage of relatively low premiums due to the short time until expiration. (An October corn serial option would trade from late July until late September, for example, with December corn futures as the underlying instrument.)

By 1993 China's Dalian futures exchange appeared on the scene, followed in 1996 with the CBOT adding overnight electronic trading of full-size ag futures contracts to accommodate global trade. The trading world was speeding up. Since then the changes and new products have come even faster:

  • The subsequent adding of 'side by side' electronic and open-outcry trading (2006),
  • adding mini-futures (2007) and eventually options contracts to the electronic platform.
  • From 2008 through 2011 the exchanges raised daily price limits several times as prices rose,
  • amended the delivery procedures and terms on wheat contracts, and
  • launched "Weekly Grain Options" in 2011. (WGO's ensure an option expiration every Friday.)

But more tools were needed. The CME responded in 2011 with Calendar Spread Options (CSO). These are put and call options on an underlying futures spread. Buying a December12/July13 corn call CSO gives the buyer the right to set a new-crop corn carry at a certain value, for example. CSOs are now listed on corn, soybeans and wheat, as well as on certain livestock futures.

By the end of 2011, merchandisers could hedge price risk using futures, as well as by using conventional options, Serial Options, and Weekly Grain Options — depending on the length of time a firm wants to cover price risk. An end user might buy an inexpensive WGO on corn, for example, ahead of major government reports in the summer for some protection against higher input costs. Or an elevator can offer minimum price contracts to farmers using any of the short or long-term options. Country elevators can use CSOs to protect carrying charges on inventory.

New in 2012

Rising consumption of grains and oilseeds and declining world inventories have only increased volatility in price and spreads, adding even more merchandising risk for ag businesses. The futures exchanges continue to evolve to meet these needs.

As of March 2012, merchandisers can trade options on the volatile Minneapolis/Chicago wheat spread, called a protein-spread. With a range of almost $1.70 over the last two years, this is an inter-commodity spread where options seem well-suited to manage that trading risk.

Then in June the CBOT added Short-Dated new-crop options on corn, soybeans, and wheat. These puts and calls on new-crop futures expire much earlier than regular new-crop options, and are more affordable as a result — all else equal. Short-dated calls on new-crop corn could be paired with a farmer's forward sale ahead of a major crop report, for example. This could make producers more confident of protecting good prices instead of waiting for even higher prices, and in time could tie in with certain crop insurance products. Feedlots might buy short-dated options to temporarily protect forward feed needs or ethanol plants could lock in minimum conversion margins.

Example:

Short-dated puts and calls on December 12 corn futures:

Short-dated #1 would expire in May 2012

Short-dated #2 would expire in July 2012

Short-dated #3 would expire in Sept 2012

"Risk Around the Clock"

But the hot and controversial item for the summer was the expansion of Globex electronic trading hours at CBOT/CME, KCBT and MGEX to a 21-hour trading day for grain and oilseed futures, and all related option products. The exchanges submitted the change to the Commodity Futures Trading Commission for the schedule as shown below:

The 21-hour day

Now the world's really in a hurry. Being able to manage price risk 21+ hours a day is fine — especially for global entities. But the change will involve some adjustments for the grain industry. Under the new CBOT, KC and MGEX Globex hours, the electronic futures trading day will end at 2 p.m. Central Time rather than closing with the pits at 1:15 pm. Orders subsequently executed between 1:15 and 2 pm CT will be on the same day's business with settlement prices and margin calls based on the 1:15 closing time. Elevators, end users and exporters that close their books daily at 1:15 CT to coincide with their futures statements will now find hedges done between 1:15 and 2:00 pm will appear on the same day's futures statement but with the offsetting cash purchases or sales showing on the next day's DPR. In time new procedures, policies, and industry standards for setting bids will evolve to smooth out the changes.

Another new risk-management tool joined the mix in 2012In May the Intercontinental Electronic Exchange (ICE) launched look-alike, cash-settled futures and options contracts on CBOT corn, wheat, and oilseeds that are identical in most ways to the legacy physical-settled contracts.The ICE contracts trade 22 hours per day (electronic only), but with slightly different hours than Chicago: from 7 pm to 5 pm Monday through Friday, central time; and 5 p.m. to 5 p.m. for Sunday night/Monday. Graphic 1 shows that firms that use open outcry and both electronic systems now have access to futures markets 24 hours a day, from Sunday evening through Friday afternoon across the various venues. (At this time ICE has not proposed a look-alike contract on KCBT or MGEX wheat, nor on CBT oat or rice futures. ICE futures on grains and oilseeds expire the day prior to First Notice Day of the corresponding CBOT futures contract.)

ICE contracts offer one distinct trading feature — "Trade At Settlement. TAS ('taz'as it's known) that can be attractive to grain firms. TAS buy and sell orders are entered for a price equal to the settlement price, or at a price up to five ticks above or below settlement. "Sell 10 Dec corn, TAS, -3 ticks." The trader won't know the settlement price when entering the order, of course, but knows the fill will be no lower than 3 ticks (3/4¢) below settlement.

Futures have been around for over 150 years but the pace of innovation and change has accelerated. The world's just in a big darn hurry. And no longer will passing Risk Management 101 be sufficient for merchandisers and managers to understand all the new tools and strategies. Now you need "Risk Management 501." Could you pass the test?

Risk Management Tools:

  • Futures
  • Options
  • Serial Options
  • Weekly Grain Options
  • Calendar Spread Options
  • MGEX/CBT Wheat Spread Options
  • Short-dated New-Crop Options
  • TAS

May 1, 2012

Technology Takeover

I recently attended my daughter’s FFA awards banquet at a local high school where she teaches agriculture. Like most kids, everyone of the students had their cell phones in their hands, typing away. After a failed attempt to get the kids to practice one more time before the event started, the teachers confiscated all of the phones from the kids on stage — and it was like taking one of their arms away to give them up. The awards ceremony went off without any interruptions, at least no one could be seen texting anyway.

The reason I bring up this anecdote is because you see it happening everywhere. Everyone is always on their smart phone — from texting to talking with someone to browsing the Internet for “stuff” — what did we do before the invention of the mobile phone?

Mobile technology also serves as a valuable tool in the workforce. As one of my co-workers stated in a meeting: “[Smart phones] have become a news delivery device.” In this industry, we rely on it for so much more than communication between one person and another. Consider how much time it took to communicate between employees at a plant 10 years ago. They had to go to a desk to jump on a computer to enter any type of data, maintenance, production or safety related information.

Today’s younger generation is very “techie.” They rely heavily on their smart phones — they can find any information with Google, retrieve data, manage personal accounts, take a picture of a piece of equipment that needs some attention, text or call a supplier for some help on fixing a problem out in the plant. As our cover story explains, it cuts downtime and improves accuracy on record keeping for maintenance in eight of Southern States Cooperative’s plants.

There is definitely a generation gap between the folks that work in the plants and manage the plants; however, in this day and age, the older generation is being forced to get on board with smart technology at our workplaces. The list of benefits is endless — and it makes our jobs so much easier.

Here at Feed & Grain magazine, we will continue to deliver information anyway you want to receive it — in print, on our website and on our mobile site as well. Feed & Grain is there when you are looking for information, and we aim to serve all generations.

Apr 25, 2012

Management Implications of the Food Safety Modernization Act

The Food Safety Modernization Act (FSMA) was signed into law a little over a year ago — on January 4, 2011. According to the U.S. Food and Drug Administration, it is the “most sweeping reform of our food safety laws in more than 70 years, and aims to ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it.” Registration under this new law is not only required of manufacturers of human food products — but also pet food and animal feed manufacturers — thus our focus on this legislation and its management implication in this month’s column. In addition, grain that is processed for human or animal food will fall under FSMA, so many grain handlers will also need to look at implications of and compliance with these new regulations.

We understand that additional regulations are not popular and you may be tempted to stop reading right now. We urge you to resist that temptation, keep reading to learn more about the regulations so you can develop a proactive approach to having your business remain compliant and enjoy success. In the following section we present an overview of the changing regulatory environment, to provide some perspective. Then we highlight the current changes affecting the feed and grain industry. In the final section we suggest some approaches you as the manager could adopt to ensure that your business is both compliant and can enjoy business success and profitability.

Changing regulatory environment

Over recent years, many observers might argue that the Food and Drug Administration (FDA) has transformed from a regulatory agency to a public health agency. Recent actions by FDA highlight this change in thinking — a case in point was the nation’s second-largest processor of pistachios agreeing to recall its entire 2008 crop despite no confirmed illnesses. This was primarily an issue with sanitation practices and Salmonella found in the processing environment — there were food safety concerns, but this was a “proactive/preemptive response,” and there were no documented illnesses attributed to this pathogen (California-based Setton Farms was the firm involved, and according to press releases at the time “…health officials stressed that this is how the food safety net should work: By recalling products to prevent an illness outbreak, rather than reacting after an illness has spread.”) This is a very different mindset than has been in place in the past, and is part of the discussion that led to passage of the FSMA. The legislation was supported by many of the major food trade organizations based on the following issues: 1) A significant feeling that “all ships rise and fall together on the tide of public opinion,” in other words — a problem in one area of the food industry negatively impacts many of the other areas;2) Imports should be equally as safe as domestic foods; and 3) No company should be allowed a competitive advantage by taking food safety shortcuts.

The Food Safety Modernization Act represents the most significant expansion of food safety requirements and FDA food safety authority since the original enactment of the Food, Drug and Cosmetic Act (FDCA) of 1938 which broadened the powers of the FDA (so named in congressional action in 1930). It grants the FDA a number of new powers, including mandatory recall authority. Specifically, it covers the following highlighted areas (this is a non-exhaustive list): Traceability, recordkeeping and expanded records access (sections 101, 204); Certification/accreditation of third party auditors (section 307); Laboratory accreditation (section 202 and others); Whistle blower protection (section 402); Sanitary transportation of food (section 111); Improving the Reportable Food Registry (section 211); and Fees (section 107), increased inspection of facilities, administrative detention, food defense, preventive controls, produce safety standards, food safety plans and many other requirements.

FSMA Highlights Enacted Rules Applying to Both Human Food and Animal Feed

Mandatory Recall Authority

Under FSMA, FDA may force a recall of a product if: 1) There is a reasonable probability that the food is adulterated or misbranded; 2) The food or feed will cause serious adverse health response or death; and 3) A company refuses to voluntarily start a recall. If the product in violation is not voluntarily recalled by a firm, FDA will issue a recall order and must provide a hearing within two days of the order. Refusal to comply can lead to injunction, criminal charges, and civil fines.

Another authority under the new law is something called “Administrative Detention.” Here FDA has the authority to detain products it believes are in violation of FDA rules, and this requires only a “reason to believe” that the food or feed is adulterated or misbranded. Products may be detained up to 20 days, with a 10 day extension possible.

FSMA also provides what is called “Whistle-Blower Protection.” Under this provision, employees have the right to report violations of FSMA or FDCA, to their employer or authorities with no retribution, discrimination or loss of their job. If the employee feels they have been subject to retribution, they may report concerns to the U.S. Department of Labor, who will assign Occupational Safety and Health Administration (OSHA) to investigate. If found liable, a firm may owe for back pay, benefits, damages, legal fees, litigation costs and witness fees.

Another area the new law covers is “Enhanced Record Access.” This comes along with the “reasonable belief” clause cited above — where FDA may believe that a food or feed will cause serious adverse health effects. An example of serious adverse health impact would be horse feed contaminated with elevated levels of monensin antibiotic. In these cases, the firm must provide access to records for the product in question as well as access to records for any other article of food or feed that may also have been affected. This access pertains to processing, packing, distribution, receipt, holding or importation records.

FSMA also requires manufacturers to register with FDA and re-registration is required every two years. This registration commences October, 2012. New regulations also provide for suspension of facility registration by FDA if there is reasonable probability of causing serious adverse health consequences or death to humans or animals.

Pending Regulations Under FSMA

Preventive Standards and Food Safety Plans

Animal food facilities will be required to analyze food or feed hazards in their manufacturing systems, identify and implement preventive controls to these hazards, monitor the controls and maintain monitoring records, and conduct verification activities. FDA will be using a HACCP (Hazard Analysis Critical Control Points) approach in developing this new regulation, and firms must document their controls through a “food safety plan.” Some example controls for animal feed include correct labeling of pet and animal feed to take into account different nutritional requirements, control of feed nutrient content, control of Salmonella in pet food (could cause illness in humans by cross-contact during pet feeding), and finally control of aflatoxin contamination in dairy feed (which could cause carcinogenic residue in milk consumed by humans).

Prevention Standards mandates: Protection against intentional adulteration (food defense)

These regulations deal with the prevention of malicious attacks on our food system, and will require vulnerability assessments of production facilities. These assessments will then be used to develop mitigation strategies to prevent food terrorism incidents.

Prevention Standards Mandates: Sanitary transportation of food

This section addresses implementation of the Sanitary Food Transportation Act of 2005, which requires persons engaged in food transportation to use sanitary transportation practices to ensure that food is not transported under conditions that may render it adulterated. Originally due out seven years ago, this regulation will have a significant impact on rail and truck transporters of feed.

Voluntary Qualified Import Program

This program is designed to accelerate entry process of imported products. It will use 3rd party auditors to confirm the compliance of foreign suppliers to FSMA and FDCA requirements.

Third Party Auditor Certification

FDA will publish special regulations specifying how 3rd party auditors will be licensed to perform inspections of foreign facilities.

How Should Management Respond?

Is there any good news in the regulations and red tape described above? Is there a silver lining in these cloudy skies? As with much of life and business — it depends on how you look at it and how you respond. First off, the requirements are the law and aren’t suggestions. Fortunately, there will be a comment period where the feed industry will have opportunity to provide input back to FDA before regulations are finalized. Secondly, any process which has as a goal to prevent problems before they occur is probably worth taking a look at, and figuring out how to implement in your feed manufacturing business.

Implementation Strategies

Stage I

In this new regulatory environment under FSMA, the first order of business should be to educate your management team. You need to become familiar with the requirements — of the law and perform an initial gap assessment of FSMA compliance — i.e. where are there areas you meet the regulations and where are the areas you don’t? Secondly, you as manager should guide your feed business to develop and implement a system to actively manage feed safety to include the following items: 1.) Find the balance between the resources you have available and your business objectives; 2.) Make a management/executive commitment to feed safety and communicate this to all parties involved (put this commitment in your strategic plan, and communicate this to all stakeholders: employees and customers alike); 3.) Establish a budget line item for feed safety and regulatory compliance.

Stage II

Moving into stage two strategic response phase involves establishing a regulatory compliance team. This team is charged with implementing compliance to FSMA, developing an emergency response plan to deal with potential feed safety/contamination issues; developing a recall program to inform customers of problems if uncovered and bring back/dispose of product; putting together an internal audit program to track the effectiveness of your feed safety program; and finally tracking and managing whistle blower issues.

Stage III

After the regulatory team has been established, you need to make sure that your feed safety programs are in place and are continuously monitored. These key areas of best practice will be spelled out in the soon to be released preventive stands mandates by FDA. The controls will need to be documented in a feed safety plan.

Stage IV

The final stage of managing compliance with FSMA involves working with in-house or external counsel to bring them up to speed on compliance issues and associated liability concerns. Another strongly suggested management strategy is to develop a set of written FDA compliance policies and guidelines. The audit program should be built upon and a corrective action system (feedback loop) should be developed. This is the stage when emphasis should be put on education and training, with a focus on awareness of the regulations and working with your staff so that they understand proper compliance methods.

A Culture of Doing the Right Thing

Doing the right thing in this environment involves due diligence on your part and a focus on best practices. Management is called upon to set the example, so as to build a culture of feed safety. Attention to this principle will set the stage for continued, prosperous business and fewer problems down the road.

Recently Added to Buyer's Guide

Model FA Belt Cleaner

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3-Rolls Assembly Upgrade

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Pneumatic Conveying System

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FSU101 Bag Sealer

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I/O Interface

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Magazine

Marketwatch: May, 28

US Corn Price Idx: ZCPAUS.CM

open: 7.6273
high: 7.741
low: 7.6223
close: 7.7113

US Soybean Price Idx: ZSPAUS.CM

open: 16.9414
high: 17.1044
low: 16.9237
close: 16.9795

US Hard Red Winter Wheat Price Idx: KEPAUS.CM

open: 11.718
high: 11.9549
low: 11.658
close: 11.7977

US Soft Red Winter Wheat Price Idx: ZWPAUS.CM

open: 10.8628
high: 11.0906
low: 10.8128
close: 10.9646