Producers' Watch

Time...our most precious resource


Time:

It's what all farmers need right now.  Sure - the long-term fundamentals for global agriculture are bullish.  It seems everyone knows that...but when will the market react?  

Just one "tweet" about progress in trade negotiations with China and our markets will react favorably, but unlike weather or seasonal patterns, there is no way to forecast or predict when geopolitical risk will diminish. 

time-our-most-precious-resource

 There are four tools farmers can use to leverage time:

  1. Storage
  2. DP
  3. Basis
  4. Minimum Price

Storage will be the most widely used tool by most producers this fall.  The reasons you might not use storage are:

  1. You are satisfied with the Spot Price
  2. Storage is not available
  3. Cash flow is needed

If you are satisfied with the Spot Price, then that goes without being said.  If storage is not available, DP or Price Later cash grain contracts enable you to move the grain to a local elevator and leave both the futures and basis open, to be priced later (typically there will be either a monthly fee or a flat fee until December 31st, with monthly fees for each month thereafter).  It is important to note, that beneficial interest (ownership) of the grain is transferred to the elevator upon delivery (a main difference between DP and Storage).

If Cash flow is needed, then Storage and DP are not viable tools; however, Basis contracts and Minimum Price type contracts enable a producer to receive an advance on the grain that has been delivered under one of these types of contracts.  Typically, up to 70% on Basis contracts and up to 100% of the Minimum on Minimum Price Type contracts (less basis and any applicable service fees).

Let's discuss each of these contracts in more detail:

Basis Contract: Generally, the basis on corn delivered during October or November will be based off of the December futures contract on the Chicago Board of Trade.  While this is standard procedure, it is possible to set the basis against a deferred futures month like March, May or even July.  This "extended basis" contract gives a producer more time to price the grain, but it does come at a cost.  At the time of this writing, the spread between December '18 Corn and July '19 Corn futures are at ~$0.22 cents/bu. If the basis at your local elevator is -$0.35 under the December '18 futures, then an equivalent basis is -$0.57 cents under the July '19 futures.  While this basis is not "sexy" or "attractive" it is the market, and it does allow for the movement of grain along with an advance payment for cash flow, while giving producers "time" for the futures to rally.  There is risk with this contract, in that if futures prices move lower, so does the value of your cash grain delivered against this basis contract.

Minimum Price Type Contracts:  If the downside risk of a Basis contract is concerning to you, then a Minimum Price type contract (there are many different types) might be worthy of consideration.  A Minimum price contract enables you to deliver the grain at harvest, receive up to a 100% advance of the Minimum Price (Cash Price, less option premium (investment), less any applicable service fee).  The beauty of this contract is you have full downside risk protection and unlimited upside potential through the expiration of the Minimum Price type contract (e.g. - most Minimum Price type contracts based off of July '19 futures will expire on June 21st, 2019.)


CONCLUSION:

In short, there are no silver bullets that address the dilemma of time, or the lack thereof.  If cashflow or space was not a concern, every farmer would simply store the grain until prices rose to a profitable or acceptable level.  Every farmer is different, and local policies vary by region.  Ask questions about what contracts are available in your area and write down your plan about how much cash flow you will need (if any), and how much on-farm storage you have (vs. what you will produce) and discuss alternative strategies with a trusted advisor. 

Check out Gavilon's Producers' Edge program to save you time marketing your grain.  I hope you have a safe and bountiful harvest!

 

 News, commentary, data, charts, research reports, ratings and analyst opinions and other information provided on this page are the opinions of the authors and intended for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell, or a recommendation or endorsement by Gavilon of any product, service or investment strategy. Gavilon makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use.



 

Topics: Market Commentary

Rob Huston, Vice President

Written by Rob Huston, Vice President

Vice President, Origination at Gavilon Group, LLC. An innovative leader with a successful background in risk management, sales & digital marketing, futures, options and OTC Derivatives. More than 20 years of successful, progressive experience with a demonstrated performance record and diversified management expertise.

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