September, 2021

Thoughtful Examination of Choices

Harvest time comes with many opportunities and lots of decisions to make: when to start harvest; what field to start in; what to do with unpriced grain delivered to town. Making those decisions can lead to even more choices. For instance, if you deliver unpriced grain, what do you do with the grain? You could sell it, store it (delayed price/warehouse receipt) or put on a basis contract. Those are just some of choices, but what should you consider about each of them when deciding what to do?

First let’s look at a cash sale. A cash sale locks in the current futures price and basis level. You know your exact price, with no additional exposure to price moves. You now have the money available for use.

The second choice is a storage contract (delayed price/warehouse receipt). With this choice you pay a service fee that gives you the opportunity to establish the price for the grain later. This contract allows you to participate in the price movement on the futures and the basis. If the futures price goes higher or basis levels improve you could achieve a higher price for your grain. The hope is prices increase more than the cost of storage. If prices decrease, you will receive a lower amount for your grain and you still have the expense of the storage contract.

Finally you could do a basis contract to lock in the basis level prior to or at delivery of the grain. You now have a contract where the basis is set, but the contract can still gain in value if futures move higher. Normally there is no fee associated with this type of contract, but you are exposed to lower prices if the futures decline in value. Talk with your local ADM representative to understand the historical basis patterns and whether the current basis is weak or strong. If the basis is traditionally weakest at harvest, it may be best to lock in the futures and let the basis float instead. This is especially true if there’s a carry in the market.

All of these contracts have their own distinct value. In preparation for harvest, research the current storage fees in your area, and write down your expectation for prices going forward, considering both futures and basis. Use this information to decide what to do with your harvest-delivered grain:

• Make a cash sale if you want income and think prices are going lower.
• Put grain on a storage contract (delayed price/warehouse receipt) if you believe prices will increase more than the fees you are charged.
• Use a basis contract if you think futures will rise and the basis will weaken.