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How grain sales work

Published on 30th May 2018

Understanding market influences is key to profitable farming

Recently farmers in Kansas had what was probably the best harvest on record for wheat, getting as much as 60 bushels per acre when 45 or so was considered pretty good.  There are a lot of variables that go into how good a wheat crop is, and weather plays a huge role.  Even how much snow you had - or didn't have - the previous winter, compared to how much rain you had two weeks before harvest, can have a vast impact on crop yield.  How the variables come together - or fall apart - makes or breaks a crop each year. Rainstorms during harvest can also play havoc with the yield as moisture effects the weight.

Growing wheat, or any commodity then, is not simple. There are things you can control, and things out of your control, such as the weather.  Getting the wheat, or any other commodity to the point of being harvested takes a lot of knowledge and effort.

The same is true for prices farmers get for their crops or commodities. Even though farmers had a great crop of wheat last year, prices were lower than they would have liked.  For those that had storage facilities, they could hold on to their wheat and hope for a better price in the future. That gets pretty complicated, but the spot price is what you can get for your wheat today and the "futures" price is what you might get a month from now if you hold on to your crop. 

Cash grain bids are prices that are being offered for wheat, usually as a future. The basis is the difference between the current price and a future bid. The daily prices are as volatile as the weather, and basis can be too. Even so, yearly basis patterns can be predicted in a general way so you can plan ahead as to when the best time to sell might be. 

Farmers understand things like the weather and how it affects their crops, and there is a lot of science in things like seed production, soil conditions and so forth. Farmers also need to have a sound understanding of the market in order to make the most money from their crops, as most grain crops do not have a huge margin of profit in the best of years. When the harvest is going on, obviously there is a lot of that crop available, and farmers don't want to sell their crops at that time if they can avoid doing so because prices are down.

Understanding the concepts then, of basis, cash grain bids on commodities and general market trends, are essential for farmers to get the most money out of their crops. Even a few pennies to the bushel can make a big difference. A good sized farm in Kansas might harvest 60,000 bushels of wheat. With that much wheat, even 10 cents per bushel would amount to $6,000. 

The market starts with   "basis."  The basis is the variation, or difference, between the spot price and the cash grain bids price at a future date. Farmers can sell their wheat as a future and they will have a contract to deliver it on a certain date in the future. The price is locked in as well at that point, so a lot of care needs to be taken in accepting cash grain bids.  The basis is often determined by subtracting the futures price from the spot price, which is also called the local daily price. This applies to wheat, or any other commodity like sorghum, corn, rice or anything else that is grown in large quantities. 

This definition sounds a little slippery, and maybe it is, but also just like the weather, and even more complicated than that. The basis can change almost daily and can change even in a small area as well.    A "narrow" or improving basis means prices are good and it is a good time to sell your grain. A wide, or fading basis, means there is too much on the market and not a good time to sell. 

Grain elevator facilities, or co-op operations, often have basis prices available, and they are available online. Wheat harvest in Kansas is in late June. Usually, in May farmers know how the crop is likely to go, and they might start looking at futures prices at that point. By the time of harvest, savvy farmers may be more concerned about storage than selling, and may still not have a contract for their grain. Harvested wheat in late June could be sold for delivery in September, for instance.

The weather is hard to predict, and prices can fluctuate a lot in a few days. But understanding yearly patterns and basis can help farmers predict the time of year when prices will be best, even if it cannot predict the precise day. Just like they generally know when the best time to plant the crop, they can also figure out the best time of year to sell, and then watch closely to pick the best day possible. Farmers are wise to make arrangements to store their crops after harvest, whether that be at the local co-op or building their own grain storage structures. 

The Corn and Soybean Digest recommends studying basis trends for three or four years in your area to see patterns for when the best time to sell is likely to be. It probably won't be at harvest time, but there are a lot of variables.  But it is a good idea to create a chart, tracing prices for the last few years to see what the patterns are. 

You should also consider how other things can affect prices.  Especially with grain that is used to feed livestock, the relative health of the livestock market will also affect the basis.

There are four things that go into establishing the basis:

  • Cost of getting the product to the market.
  • Cost of storage and availability of storage
  • The price of grain itself and this is where knowing the basis trends come into play
  • Local demand and the ability to get it to market. This is more the logistics side, as opposed to the prices being offered.

Here are some things you can do to take advantage of prices and get the most money from your crops. Cash grain bids are the prices offered on the futures market, and paying close attention to these prices will make a huge difference.

Knowing the basis, and yearly patterns are the first thing to do. Make a chart and studying it carefully. Pay attention to other related events and situations as well. If you are a corn grower, pay attention to what is happening with livestock in your region, for example.

Once you have a pretty good idea of the patterns, and other related things that could affect price, you can start a strategy. You can avoid selling at bad times, and sell at better times.

As we have implied, avoid harvest sales. If you are having to do this because of a lack of storage start planning for next year and make arrangements for storage before you plant next year's crop. The cost of creating or arranging for storage will likely be more than offset by the better prices you will be able to get.

Finally, farmers should consider their farms a grain market and operate accordingly.  Grain elevators store grain and sell it when it is most advantageous to do so. Farmers obviously need to do the same thing. 

Farmers go to great lengths to select the best seed, to learn all they can about soil conditions and how to get water to their crops. Controlling insects and disease are another major thing that has to be done to keep the crop healthy. The same amount of effort also needs to go into studying and understanding the market.

Understanding how the yearly patterns of basis operate is essential for farming operations to be profitable. Cash grain bids fluctuate a lot, depending on all kinds of things that can influence the market. Weather, crisis halfway around the world, even things that happen politically between nations, or anything else can affect the price of grain. 

You cannot control the cash grain bids or the daily prices that are offered. What you can control is when you sell the grain, or when you lock in cash grain bids at a future date.

The price of wheat in Kansas has varied a lot. In the winter of 2008 prices were over $10 per bushel, which was way above normal. According to Macrotrends.net, prices fell by half but rebounded to $9 per bushel by the winter of 2012.  Prices for wheat have gone down since then, but there have still been a lot of peaks and valleys. 

It seems in the Spring the price increases, and that could be due to supplies running low and it is not too far until the next harvest.  Still, these are general trends for the entire state. Prices in the western part of the state are often different than the eastern half. 

The price of wheat in Western Kansas has climbed steadily since the first of the year. As 2018 began wheat was trading at $3.60 per bushel, and by the end of January it had risen to $4.07.  By early March the price was up to $4.60 but by the end of March, it was down around $4 again. This is all wheat that was harvested last June and has been in grain silos since then. At that time wheat was below $4 and all of these prices were future cash grain bids on commodities at that time. 

According to state statistics, there were almost 7 million acres of wheat harvested in the state in 2017. Statewide there was an average of 48 bushels per acre, and 59 bushels per acre for irrigated wheat. (Most wheat is not irrigated because the cost does not provide enough more yield.)  That comes to 333 million bushels of wheat produced in the state. If there is an average of $4 per bushel that would mean the value of the Kansas wheat crop is $1.33 billion.

 

 

 


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