Tuesday, August 30, 2011

A Minute Means Money... or maybe not!

There is never a minute that we should take for granted. I really do mean never taking a minute for granted in all aspects of our lives! Over the past few weeks I have had a crash course in grain contracts. Overall, I have learned that each commodity's contract is unique and pretty much just tells the seller that the elevator will take a specified amount of commodity.

On our farm we have been hauling wheat fromt he field to local elevators. Most of it has been contracted. These specific contracts bind both the elevator and producer to deliver and buy a certain number of bushels of wheat at a baseline price. Our elevators use 14 protein for their base contract price. This means that if you bring in a load of wheat you would get a bump or a premium above the price for proteins higher than 14 and a discount on the price if it is lower than 14 protein. Generally, once a producer brings in a load of wheat on a contract the price is set until the contract is filled. Some days a producer will fill several contracts. All of which will have the same premiums and discounts for protein because they are delivered on the same day.

Examples of how premiums are paid out are:
If 14 protein wheat is $4.00/ bushel for each .2 protein increase between 14 and 15 protein the producer would be paid an additional 20 cents. So, 14.6 protein wheat would be worth $4.60. When protein reaches 15 protein the producer would receive the 20 cent premium for each .2 and then an additional 75 cent bump. So 14.8 protein wheat would be $4.80 and 15 protein wheat would be $5.75. But, if you had wheat that was less than 14 protein you could be discounted 30- 40 cents. So if you had 13.2 protein wheat at a discount of 30 cents .2 protein then you would receive a discount of $1.20 for a price of $2.80 per bushel. ( Note: premiums are different at different elevators and on different days. They are generally set by supply and demand.)

Well, about 2 weeks ago, things as we knew them changed. We hauled a few loads of wheat into the elevator filling one of our contracts. Like I said generally the base price and premiums are set from open to close each day and do not change during the day. About 45 minutes after filling one contract, we hauled in another load. During that short period of time (thank you cell phones and technology :-)) the elevator had been given notice that South Dakota (a typical low protein state at about 12 protein) had shipped a load of wheat to Minneapolis that ended up being 16 protein. Thus causing an immediate decline in the need for higher protein wheat and the elimination of premiums for it.

So, when we went to dump on a new contract, we no longer had a premium for our high protein wheat. WAIT A MINUTE.... IT HAD ONLY BEEN A FEW MINUTES.... WHAT DO YOU MEAN? Needless to say there were a few unpublishable comments and several phone calls made to get to the bottom of the price difference. Yes, we know that premiums are a bonus, but they are important when we work hard to raise and plan for a certain percentage of our wheat to be higher protein. It is also important because producers often blend higher proteins with lower proteins to improve their price at market.

You may ask, "What really is the big deal?". Well, let's pencil it out.
If a field produces 45 bushels per acre and a producer raises 1000 acres of wheat that means there are 45,000 bushels of wheat.
Here is the price difference for the above protein premium scenario for the 45,000 bushels of wheat if 14 protein wheat were to be $4.00:
14 protein -$4: $180,000
13 protein-$2.50: $112,500
15 protein- $5.75: $258,750
WOW! That's a lot of money!

Ok, Ok, Ok. I know that not all of a producers crop would get the exact same price, but for princple, the difference is powerful. Many producers raise more than 1000 acres of wheat and do get quality premiums for raising higher protein wheat.
For our farm, literally the matter of just a few minutes, brought a deduction in income of over $30,000. More than I made working all year off the farm. I know I should know that nothing is for sure in farming; but, we get so comfortable with the way things are and have been that we often forget that they can change unexpectedly (and it is not always Mother Nature's fault)!

So, no matter what you think you know, what has historically been done, where things are trending in the markets, a simple change in supply and demand and circumstances out of your control can change the way you operate at any time.

Be thankful for what you have and never take anything for granted!


  1. Great job explaning commodity prices and I love the picture of the hands holding grain!

  2. Katie, you have a way of writing that makes it seem simple. I am still in awe of what information our farming husbands have in their head when it comes to marketing. I am still learning!

  3. I actually work for the elevator in Taylor. This happens often, and I never really understood the impact on income until I sat down with a farmer friend one day and figured it out for him. Contracting can be great, and it can be the worst thing. You just never know. And like you said, that minute can change a lot! I am now following your blog. Like to keep up with other ND farm families!