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Ontario's middle east | This is for 1234, I see he edited in more questions and that thread is getting long. I think if farmers understand how the system works they can be better prepared to market into it. Some elevators operate by buying cash grain and immediately selling cash grain for a small margin. We refer to that as back to back trading, very safe but no room for price appreciation. Some will speculate. Buy cash and hope it goes up or vice versa. Huge opportunity for price appreciation, but I bet just about NATer can tell a horror story about how this usually ends. This leaves basis trading and this is how the lion's share of grain trades. Since we don't always have someone in the market to buy cash it is much easier just to buy cash and sell futures. This establishes a buy basis on the grain, a priced physical purchase and a short futures position, but more importantly it gives us time for basis to change. At some point in time that position may have grown to a sizeable position and he decides he wants to move it. Meanwhile over on the river an exporter, who is a basis trader as well, needs to fill a barge. He is now pushing basis up a bit to make the crop move. The elevator looks at that and says I have an average buy basis on this at -10 and I can sell them for + 10 fob and make 20 cents. If that is the best he thinks he can do he will go ahead and sell the cash beans. This still leaves him short futures however so he is over hedged and needs to buy the futures back. The exporter on the other hand sold those beans overseas or wherever and bought futures to hedge his position, so he now has long futures in his account that need to be sold. ( or an eplant may have sold ethanol and bought corn futures) Instead of them both going to the board and trying to buy and sell, they can just do an exchange for physical, where they just exchange account info and the buyer "gives " contracts and the seller "takes" contracts. This gets rid of the hedges and leaves the exporter with priced physical. The elevator could have had a gain or a loss on the physical but that would be offset by an equal gain or loss in the hedging account. It's not rocket science but I think it's a good thing to understand how and why various players do what we do. To finally answer your question 1234, it don't matter to me what price does I only care about buying low basis and selling high basis and not always in that order. If we think basis will tank, we can sell it now and buy it in later for less. Yes, we could be wrong and might burn later, that is how a market works. Keep in mind though, that when you get some big players positioning themselves according to what they see coming, it is going to drive the market towards what they see coming. I strive to take as big a loss on cash grain as I can, remember, every cent of it is paid back by Chicago (minus clearing fees of course ). I really can't think of another business that wants to buy high and sell low, but such is the elevator business. | |
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How elevators trade grain
