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central illinois | Having been a merchant in the grain, cotton, and energy industries over my career, the merchant will not show you his best deferred bid now as it makes nearby product more difficult to buy. If he shows a bigger carry to the deferred, it encourages you and everyone else to withhold their grain from the market. He most likely would only push his deferred bid if he is trying to cover a deferred sale, so if you have an offer out there he may book it when he needs product in that time period.
For example, A corn wet miller may have a bid currently from a soft drink manufacturer for HFCS (high fructose corn syrup) for summer (June,July, Aug) shipment. In deciding how to respond to that bid, the wet miller looks at the relevant futures prices and projects what basis they will have to pay for cash corn. Having an offers out there, tells them what they are likely to have to pay for corn in that time period. They will also calculate what it costs them to buy nearby corn and carry it ti that time period in their elevator system and then deliver it to the processing plant. If you have an offer out there, and they sell the HFCS contract, they may book your offer as the means to start to lock in some of their processing margin. Booking your offer at a premium over the bid also justifies to their internal systems that carrying corn inventory against the HFCS contract is a moneymaker.
Don't forget that everyone is selling something and trying to make or protect a margin in their business. As farmers, we are the beginning of the value chain in food production. For corn we are producing a cheap and easily storeable and transportable source of carbohydrates. Those corbohydrates get turned into hydrocarbons (ethonol), proteins (meat), other carbohydrates (starches,sugars,etc). Depending on what section of the value chain has constraints of investment or production or has more market power, the margin moves around the various sectors. We all remember $7.00 corn when the margins in our section of the value chain were tremendous. And what happened was the resources we need to produce that $7.00 corn all were able to increase their margins as well (ie. seed and fertilizer ). We attracted capital to the market to 1) improve production practices (tile, irrigation, improved seed varities); 2) bring new land into production (switch from other crops, out of pasture/CRP, new land around the world and the investment in infrastructure to support it's production). | |
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Question for Grain Merchant
