and Patrick Meagher
VANKLEEK HILL — The local grain elevator is calling, eager to buy a farmer’s unsold crop. It’s a sure-fire indicator of that grower’s impending exploitation before prices take a sudden leap, right?
Kevin Wilson of Wilson Farms in Vankleek Hill dispels the common misapprehension by pointing out that the modern industry doesn’t function that way.
“People think that if the grain elevator’s calling … that we want to buy your crop because we know something you don’t. And that’s not the case at all,” says Wilson. “Our job as grain elevator operators is to get our farmers the best price they can for their grain, no matter what.”
That’s because the elevator earns its money even if the farmer sells at the peak price and then the price plummets.
How is that possible? The grain elevator operator uses a hedge account, a counter intuitive strategy, that is so complicated many people walk out of seminars on the subject still scratching their heads.
An elevator could potentially pay, for example, $250/tonne to a farmer for corn and later sell that same corn to an end user for $180/tonne “and still make a profit,” Wilson says. “That’s where the grain elevator is at its best.”
Here’s how the hedge account works.
The grain elevator operator sees that corn has hit $7 per bushel and he figures that is about as close to the peak price that he’s willing to bet on. He calls area farmers and tells them the good news. They can sell corn today on a futures contract (with a specified future delivery date) at $7 per bushel and that’s likely the best price they are going to get. While the elevator operator is on the phone with the farmer who agrees to sell, the elevator operator is typing in his futures contract request that he fires off to the Chicago Board of Trade. He triggers a contract to sell that farmer’s corn at $7 per bushel for delivery in, say, December. Before December arrives, the elevator operator watches the price go down and “lifts his hedge” by buying corn on the Chicago Board of Trade for, say, $5 per bushel. From the elevator operator’s point-of-view, he sold grain first at $7 per bushel, then bought grains for $5 per bushel. On paper he’s earned $2 per bushel.
He still has to deliver the grain that is stored in his bins. So, he might later sell to an exporter or to a local end user. At that time, local farmers might still want $7 per bushel for their corn but the end user only wants to pay for $5 corn. The end user can’t find grain for sale and offers a premium price, say $6 per bushel, because he needs the grain. The elevator operator steps in to sell the end user some corn at $6 per bushel. The end user is happy to not have to pay $7 per bushel and the grain elevator operator is happy that he still earns $1 bushel. And the farmer is happy that he got $7 per bushel corn and didn’t have the headache of hedging. So, everybody’s happy.
Hedging, however, is not for the faint of heart, says Kell Grain merchandiser Steve Kell. When the grain operator sells a futures contract, he must make a margin payment in case price continues to rise. It is possible for things to go badly. After triggering a futures contract, let’s say that price moves from $7 per bushel to $8 per bushel and there is no way of getting around that price. While the farmer might think he could have gotten a better deal, the elevator operator is sick to his stomach lying awake at night. Why? Because the elevator operator has to pay out of pocket $1 per bushel on every 5,000-bushel contract he signed. If that elevator operator has 10 contracts (selling 50,000 bushels) he has just lost $50,000.
“There’s no smoke and mirrors in the grain elevator business,” Wilson said. “We’re here to help our guys make money. Our success is tied to the farmer’s success.”
Wilson said that a lot of elevators are dedicated to putting information out there to buyers and that includes Wilson’s recent release of a mobile app that tech-savvy farmers are installing on their phones. “There’s a very good communication network between elevator and farmer right now,” Wilson said.