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North west MN | Roger Wright explained it in a email comments a while back I thought was interesting read. I suppose you could ask for a warehouse receipt. I have a little wheat stored in a local elevator and asked them how much room they had he said they shipped all the wheat out and are empty only a few beans and they ship them out as fast as they can saving room for bean and corn harvest.
Here is what Roger said
In order to be in a position to capture a price recovery, there are five alternative tools:
Sell the cash and buy futures.
2Sell the cash and buy call options.
Deliver the grain on a basis contract, get a cash advance, usually 70%, leaving 30% as an unsecured interest free loan to your grain buyer.
Deliver the grain and put it on Delayed Price, aka DP, which is an interest free, unsecured loan to your grain buyer equal to the cash value of your grain.
Put the grain in commercial storage and get a warehouse receipt.
Many people think DP grain is stored by their buyer. Not true! Grain stored by a commercial grain dealer requires the buyer to issue a warehouse receipt certifying those bushels are on his premises and the title of the grain belongs to the farmer. The merchandiser cannot sell it or use it for feed or processing. If the buyer goes bankrupt, that warehouse receipt puts the owner of the warehouse stored grain at the top of the creditor list because that grain is his and he has the paper to prove it. The issuer of the warehouse receipt cannot use that grain for collateral on his loans.
The title (legal ownership) of grain on DP transfers to the grain buyer the instant the grain starts flowing into the pit. The grain buyer can use that grain as collateral for his borrowing needs. If his lender forecloses on the elevator (or processor), that grain belongs to the lender. The farmer is owed money, but he is an unsecured creditor and stands at the end of line when the bankruptcy court starts handing out money after all the grain handler’s assets are sold. The holder of a warehouse receipt is at the front of that line. He is even in front of the lender with a first mortgage on real estate and the first lien on chattels.
DP grain is seldom ever kept in the buyers’ facility. They will sell or process it and sell the products. That grain will soon be gone after delivery, never to be seen again.
But… if the cash price goes up after the buyer sells the grain, the farmer expects to be paid that higher price. The cash price may go up because the futures price goes up or the basis firms or both.
The instant the grain buyer sells the DP grain or processed products, he will buy futures. If futures rally $2, the merchandiser will make $2 in his futures account and will use it to pay the farmer when he cashes-out his DP grain.
But what if the basis firms 20¢; or 30¢; or 40¢? Where is the merchandiser going to get that money to pay the farmer? There is no place to hedge the basis because the basis is a function of local supply and demand.
If you put corn on DP this month and four months from now, the futures price is $2 higher and the basis is 40¢ firmer, you are owed that added $2.40 over and above what the cash price of corn was worth the day you delivered it.
The $2 comes out of the merchandiser’s futures account. But there is no place from which to pull the 40¢ basis improvement. But the farmer is entitled to it!
And, that basis improvement, Ladies and Gentlemen, is why there are DP charges. Yep, the farmer pays for the basis improvement on his own grain.
In years with tight storage and/or increased transportation costs (such as high fuel prices or high barge freight due to shallow water), the basis is weaker than normal and will improve more than usual after harvest. Therefore, the DP charges are higher than normal.
The basis firms very rapidly as the harvest winds down, perhaps 15 to 20¢ in two weeks and then another 20¢ in the next few months. A DP charge of 4 or 5¢ a month does not cover the basis improvement of an unusually weak basis.
That is when the “dump” charge comes in; it covers that expected rapid basis improvement as the harvest winds down. It is a lump sum fee per bushel the instant the grain hits the pit from the truck.
And one more item to consider: If every farmer put a majority of his grain on DP, the grain would be legally owned by and in the possession of the grain companies. What do you think the basis would be? | |
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Simple grain storage vs DP
