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Establishing the Value of a Grain Bid: an Article on Transparency in the Grain Market

Grain companies look at variables in their market place on a daily basis to arrive at a single bid for the commodities they handle. The goal is to arrive at a value which is fair to the producers. Transportation, markets and direct costs are complex factors that make up the local cash price of the commodity. Transportation is a variable cost which moves on a daily basis and can greatly affect the value of commodities. Truck freight can move up or down depending on the supply and demand. Rail freight is another variable which affects all markets, including those not tied directly to a rail line.

 

Carry and inverted markets are two different structures affecting cash grain prices. A carry in the market occurs when grain is worth more in the future than it is today. The combination of a large harvest and the ability to meet the demands of end-users can create this carry. Carry markets mean someone needs to pay to hold grain off the market. The value of holding this grain off the market becomes a variable in which each participant has to figure into the cash price of the local bushel. An inverted market occurs when grain is worth more today than in the future. A small harvest and high end-user demand can cause an inverted market, creating an immediate need for the commodity and leaving very little opportunity to hold the grain. Market participants are penalized if they hold their grain too long. Inverted markets allow elevators one chance to make revenue and this is considered when determining the cash value of grain.

 

Personnel costs, asset improvement, and regulations are costs which are somewhat harder to measure but must be taken into account when setting values of the cash grain. We often hear our customers comment on the importance of retaining good employees. Finding good help in all industries continues to be harder and paying a competitive wage is paramount in this battle. Improving assets to keep up with the producer’s move to bigger and faster equipment is important to meeting the needs of our current and future customers. The idea of building speed and space and replacing 50-year old facilities is an expensive and daunting challenge. Existing facilities which are quite aged will continue to require maintenance and repairs until they are replaced. Increased regulations continue to be a major change to our industry. The new Dodd Frank Law, which is a securities paper regulation, places more cost on the handling of commodities than the industry has ever seen. Although we wish these regulations would decrease over time, this expense will most likely continue to increase. With all these moving pieces our commodities markets are still some of the most efficient and transparent markets in the world and we’ve seen little change in margins over the years. Marketing grain is more about timing and understanding trends rather than nickel and dime transactions.