Grain Trading—the Pricing Pipeline/Process

Grain Trading—the Pricing Pipeline/Process

 

What Are Cancellations?

The term “cancellation” in grain trading does not mean foreign buyers can just walk away from contracts without penalties. It instead means there are offsetting trades between two parties that effectively cancels the original contract. This often involves a money exchange between two parties as the original sales need to be shifted to other buyers.

 

How Do Cancellations Work?

To answer this, it helps to first understand how grain trading works after farmers sell and deliver their grain.

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4 Things to Know About the Renewable Fuel Standard

4 Things to Know About the Renewable Fuel Standard

The U.S. biofuel blending program—the Renewable Fuel Standard (RFS)—gets a lot of headline time in agriculture as it directly correlates with corn and soy bean production.  Understanding the dynamics of RFS and the role government agencies play is another ballgame.

 

Here are the RFS basics:

 

  1. RFS is a Federal Program

RFS is a program that requires transportation fuel sold in the United States to contain a minimum volume of renewable fuels. The program started with the Energy Policy Act of 2005 and grew through the Energy Independence and Security Act of 2007.

 

  1. Blending Requirements Are Based on Fuel Availability

The Energy Independence and Security Act of 2007 (EISA) set yearly RFS volume requirements for each renewable fuel category.  EPA sets an annual blending target that we can expect to increase yearly.  For 2022, the EPA has set a target of 36 billion gallons. 

Read more: 4 Things to Know About the Renewable Fuel Standard

How Grain Trading Works After the Farmer

How Grain Trading Works After Farmers Sell And Deliver Their Grain

What Happens to Grain After It’s Delivered to Elevators?

Some farmers may be surprised how many times 1 bushel of grain changes hands before it’s consumed or processed in another country.  As a farmer and grain trader, I’ve watched grain sold from our farm and delivered to an elevator be sold and shipped by rail 500 miles away to be used for some type of animal feed several months after we deliver it to my local elevator.  That company however might have turned around and sold those bushels to another company before the train was loaded and this new buyer may take the grain to another destination possibly for export.

If that second company sells it to an export facility the new third buyer in the chain may either arrange vessel freight and export paperwork themselves or sell it yet to a fourth company to handle export transport logistics across the ocean.

Once the grain arrives in another country, it can be sold again to another company who off-loads it and puts it in storage.  This foreign company might sell it directly to an end user or it could be sold several more times before reaching the final-end user.

While there are countless possible trade scenarios, most exported grain is transported by at least 3 modes of transportation (i.e., truck, train or barge and bulk ship or container vessels) and can be traded between 6 to 8 different companies before it reaches the final end user in another country.

Read more: How Grain Trading Works After the Farmer

Understand The Basics of “Basis”

Understand The Basics of “Basis”  -  Basis analysis can be the foundation of pricing decisions.

Basis is simply the difference between local cash prices and the futures price at the CME.  To start your analysis, collect basis for several vendors locations at least once a week.   Over time, you’ll see clear marketing signals from the basis analysis. 

Know the Cause

Basis is influenced by several factors. Those include:

Read more: Understand The Basics of “Basis”

The Risk Management Process

Risk Managementa 2 step process:

1.      Identify and analyze exposure.

2.      Determine how best to control minimize and reduce the impact of uncertain events to that exposure.

 

Risk Management Questions

1.      What do you want to happen in the marketplace?

2.      What do you think will happen in the marketplace?

3.      What can you ill-afford to have happen in the marketplace?

4.      What are you actively doing to achieve what you want, while protecting against what you don’t want to happen?

 

Goals—what are your pricing goals?

Each customers goals are as diverse as the customers themselves…but most fit in the categories below.

1.      Stabilize pricing

2.      Margin protection

3.      Attain budget

4.      Eliminate /Reduce surprises

 

Once these basic parameters have been identified, we will formulate a procurement strategy that optimizes the pricing goals and provide a stable cost horizon.

Then all that’s left to do is the step best summarized in a quote attributed to Winston Churchill:

“However beautiful the strategy, you should occasionally look at the results.”