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Get Aggressive!—The Crucial Disciplines of the Aggressive Basis Buyer
by Sherry Lorton

As a merchandiser your goal is to buy good basis and sell good basis. When it comes to the buy-side of merchandising, a good buy basis is generally harvest basis – the basis is the weakest at times when supplies are the greatest. Ideally, if you could buy all of the bushels during or prior to harvest you would be able to own the best buy basis of the season.

Buying harvest basis benefits the producers too. It is in their best interest to sell grain when futures prices are rallying. By taking advantage of price rallies that occur ahead of harvest, producers can lock in sales at profitable levels and be in a position to turn their grain into money as soon as it is harvested with no additional marketing costs. The farmer sells at a profitable price, the elevator or feed mill gets to buy good basis; it’s a win-win for both parties.

The challenge of buying grain in a high-priced environment is that it can require a lot of money. You buy grain and sell futures to establish a good basis position; but, you also create a financial obligation to fund the futures as prices move higher. The more successful you are at buying grain in this environment, the greater the financial burden becomes. There are times when you can even fall victim to your own success -- you buy more grain than your finances can bear.

One of the dilemmas of merchandising is how to be an aggressive buyer of grain at the times when you need to be – that is when prices are up and basis is weak -- and still manage the financial responsibilities that come with it?

The solution is in many ways a matter of taking control. To keep yourself in a position where you can continue to be an active buyer of grain in all environments, you have to maintain control of how you buy the bushels and keep your ownership at a manageable level. Implementing a few simple disciplines into your buying practices can help you achieve the control you need to do this.

Buying Discipline #1 – To be an aggressive buyer you must be an aggressive seller

Everyone has some limit to the amount of grain they can own. If you are to be in a position where you can continue to buy grain as prices move up, you have to be a proactive seller. Selling is the key to keeping control of your cash flow at a time when the market is putting a lot of demands on your finances. If you are not an active seller, you could put yourself in a position where you have to stop buying grain. Neither you nor the producer will enjoy that situation!

Buying Discipline #2 – Impose limits on the size of your positions

Imposing limits on the size of your position is one of the most effective disciplines for keeping control of your merchandising. The concept is simple. Have a policy that states clearly the amount of bushels you are willing to own at any one time. Your limits are typically based on your financial resources. When you get in a position where you are buying a lot of grain and start to get close to the number it is time to start selling. Limits are a good way to move you to action before potential problems arise.

Elevators tend to look to their banker to set the limits, but the problem with this is if you wait for the banker to say “enough is enough,” you are probably too late. Anytime you are forced into a decision it is usually not done in your best interest. Self-imposed limits are the way to keep ahead of the bushels – and ahead of the banker -- so that you can keep buying grain and merchandising bushels with you in control.

Buying Discipline #3 – Buy grain with adequate margins

The final discipline of an aggressive buyer is to buy grain at an appropriate basis. This means basing your buy basis on realistic resale values – not just what you think you can sell grain for at some point in the future but what can actually be traded – and putting adequate margin into your bid. This way if you get into a position where you are forced to sell the bushels you can do so and still make a reasonable margin.

It is also a good practice to put wider margins in your bids as prices move higher. The higher the price of the commodity the more cost (interest) and risk you take on in buying the bushels. It makes sense that you should be fairly compensated for your expense.

Following these few simple disciplines will give you the control you need to be an aggressive buyer and enable you to capture good basis while at the same time providing meaningful services to your customers.

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