Grain Marketing Trap Very Expensive
A fairly new client called Monday afternoon and asked what should she do with 9,000 bushels of beans in the bin. Sell or store until after harvest? She said her merchandiser told her the basis would drop 30 cents in the next week or two, she did not need the money, had fondness for storing beans a long time and had never done anything except store, forward contract, and cash sales. She is a pretty typical farmer when it came to marketing grain.
When asked what she thought the market would do, she said she thought it would go up eventually, if not sooner, and that was why she was willing to store the beans on the farm through harvest.
If bells are not ringing in your ears and red flags flashing in front of your eyes, you really need to keep reading.
After an explanation about what the bean basis will do between the now (second week in August) and harvest time, she immediately made it very clear there was no way she was going to do any of that futures or options “stuff.”
Roger told her “no problem” and recommended she should put the beans on a basis contract and deliver the beans now. She would probably get a 70% cash advance, lock-in the basis before she lost more than a dollar a bushel in the next 45 days, and if futures did rally, she would make the same money on the basis contract that she would have made if the beans were in the bin with no condition risk and 70% of her money in hand. She was informed if bean futures declined $2, she would lose that also just as she would with the beans in the bin. If beans lost 30% of their value, her grain merchandiser would be calling her for margin money...
There was a very pregnant pause, and then she said, “I never did that before”. Roger explained if she sold the grain, she was going to miss out on the soybean rally coming very soon in the futures. If she left beans in the bin on the farm, she absolutely was going to lose more than a dollar a bushel on 9,000 bushels in a matter of weeks. But if she did a basis contract, she could avoid both potential loss of income.
Another pregnant pause in the conversation. Roger, sensing he was about to fail in his education effort said, “I would really prefer that you find out exactly what the basis is for delivery now, basis for fall delivery, and what basis your merchandiser will offer you for a January basis contract with beans delivered this week and then call
me in the morning.”
She more or less agreed.
By nearly 11 AM Tuesday, Roger had pretty much given-up on a call back. A few minutes later, she called. The first words she spoke were, “I am going to do it. I checked it out. You were right, I can get 70% cash advance and…” etc.
Actually, Roger was pretty disappointed he did not get chance to show her how much money she was going to lose if she left the beans in the bin, but here it is for you!
Using CHS quotes at a nearby location to our client:
Basis for beans delivered this week: $1.75 over September which is the same cash price as $2.39 over the November.
The basis for beans delivered in October is 28 under the November.
If she left her beans in the bin, she would have lost $2.67 a bushel (from plus $2.39 to minus 28) on basis, regardless of what the futures had done. Ladies and Gentlemen, that is more than $24,000 on 9,000 bushels.
By the way, the corn basis at the same CHS location is 82 cents over the Dec for August delivery and 28 under the December in October. Corn left in the bin will lose $1.10 basis a bushel in the next 50 days.
Folks, farmers are the only people who store grain and beans and lose money. This old crop to new crop basis loss happens every year and it is farmer marketing enemy number one.
It is just one more reason why you need to separate the day you lock-in the basis from the day you lock-in the futures. Those bins you paid big bucks to own, often make you a lot more money empty that full.