Options for farmers short on bushels for grain contracts outlined
By Jean Caspers-Simmet
Date Modified: 09/10/2012 2:47 PM
CALMAR, Iowa —For farmers who have 2012 grain contracted and are going to be short of bushels due to the drought, David Hemesath, general manager of Farmers Union Co-op at Ossian outlined their options at a meeting last week at the Dairy Center at Calmar, which was sponsored by Citizens Savings Bank of Spillville and Fort Atkinson."Quite frankly, you don't have a lot of options," Hemesath said.
Most grain elevators are not brokers, and any grain transactions must be tied to the sale or purchase of physical grain, including options, Hemesath said. They can only release producers from contracts in case of crop failure, otherwise the transaction would be viewed as an off exchange futures transaction, which is illegal.The ability and cost to buy back contracts may depend on if the elevator has the grain hedged or forward sold, Hemesath said.
There are several types of contracts. The most common is a purchase contract where the flat price is set, both futures and basis, and the farmer delivers the grain in the month contracted.With hedge to arrive contracts, the futures price is set and the farmer sets the basis at some point. Farmers have the ability to roll contracts forward if market conditions allow. They are not allowed to roll forward to the next harvest year.
"This goes back to 1995 to 1996 and the hedge to arrive fiasco," Hemesath said. "Back then it was pretty common that producers would sell multiple years in one year. They would hedge all their grain in July and wait for a carry into fall. When they got that carry, they'd roll it forward and then roll it forward with another carry to the following July."In 1995 to 1996 there was a short crop and instead of having a carry in the market, there was a $1.50 inverse.
"They were probably contracting corn for $2.50 to $3 and later on it went to $5," Hemesath said. "If they had $2.50 corn hedged and took a $1.50 off, they had corn sold for $1 for two years. That year a lot of grain elevators went broke and a lot of farmers went broke."With basis only contracts, the producer needs to set the futures price to arrive at a final price. Basis, Hemesath said, is the difference between the Chicago Board of Trade and what the producer will get paid. Basis consists of the end user basis bid, freight, margins and elevation charges.
Farmers who can't fulfill their grain contracts have three options, Hemesath said. They can buy grain to fill the contract, either from an elevator or another farmer.A second option is to roll the contract to fall 2013. There are costs involved including the inverse in the current market, Hemesath said.
"There are some grain elevators that are not going to be willing to do this, and if we have a flood of people who want to do this, we may have to look at how much we're going to do," Hemesath said.The third option is cash settlement of the contract.
"This is the cleanest, and the one we prefer, but there are costs involved, and basis changes can alter pricing," Hemesath said.He sees 2012 as unprecedented territory.
"There has not been a drought of this magnitude in the ethanol age," Hemesath said. "No one can predict how this will unfold, and you as producers need to take appropriate protections for your current year operation and still be able to capitalize on 2013 opportunities."Several ethanol plants told Hemesath that if the drought intensifies, they'll call contracts, crush and close for a year.
Beans could be physically gone by spring, and it may take beans to buy soybean meal, Hemesath said. Farmers may want to hold soybeans for livestock protein.He cautioned against doing very many 2012 cash contracts until farmers are sure of yield. He suggested using options instead.