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Policy, Accountability and Money Left on the Table
by Glen Ludwig

The huge 2007 corn crop certainly confirmed your customers were effective at responding to the increasing demand for corn. The crop created significant demand for and stress to the service capabilities of most country elevators across the Corn Belt. As a result many Creative Ag Solutions (CAS) clients have again already inked commitments for aggressive investments to improve grain service infrastructure prior to the 2008 harvest. Sticker shock is common as project cost escalation continues in a high demand market.

During post-harvest conversations with clients, I heard concern expressed about the explosive capital demands linked to the grain business. Fueling the demands for cash are more bushels of ownership, record or near record grain prices, big books of to arrive purchase contracts stretching out over several crop years, plus those higher priced fixed asset projects. If your agribusiness also markets farm supply inputs, you are dealing with another layer of increasing capital demand.

The current business environment is testing the financially strong and punishing those with anything less. Not surprisingly, lenders are looking for their clients to improve working capital positions. All of this drives a need to budget for and deliver improved income. CAS believes this environment provides both a great opportunity and the need to evaluate your positioning and pricing of grain services (particularly storage) and capture greater earnings.

The current situation
Generalizations can be inaccurate when applied to a large area. With that disclaimer, the following is how CAS views this positioning and pricing situation for the center of the Corn Belt:

  • The most highly valued service provided to producers by the country elevator is fast turn around of grain transportation vehicles at harvest, a service from which most elevators generate no direct revenue. There's a disconnect between value to the customer and revenue generated for the service provider. In many cases investment in grain receiving capability has been short changed by elevators in the last 5 years, as focus has been on increasing storage capacity. Until demand subsides the cost to build and operate grain storage and receiving capacity is likely to continue to escalate.
  • Elevators provide a large percentage of the grain storage in Illinois and to a lesser extent in the other states CAS serves. As production agriculture continues to consolidate and cash rented acres increase, grain producers are likely to be less interested in building on-farm grain storage. This is particularly true if a fast unload is being provided at the elevator. Elevators with strong profits and solid balance sheets may well have the opportunity to increase the percentage of the crop stored at the elevator.
  • Elevators usually allow producers to control and use a high percentage of their storage capacity at the time of the year when this space is most valuable. In recent years the market has offered exceptional revenue opportunities to those who control, effectively use and merchandise space. Elevators typically offer grain storage to producers at rates well below the market value of the space--another market reality disconnect. The under value pricing of storage rates tends to further complicate logistics as the sub-value rates send a message that ample space is available, when the opposite might be true.
  • Further impacting harvest logistics are post-harvest bids reflecting strong cash carry combined with a storage rate structure that is pricing space less than value. This communicates to producers that the elevator would prefer that producers rent and control the elevator space. More times than not, the elevator would make more income if the opposite occurred.
  • Several factors may (in the long run) diminish producer's desire to build on-farm storage. They include corn prices well over FSA loan rates for all currently traded crop years and cash rent payment schedules creating earlier cash flow needs for producers. The more fluid acre footprint of a cash rent farmer also discourages building storage at the home farmstead. To the extent this occurs, the elevator will get to do more of the job of responding and profiting from basis and spread signals from the market.
  • In the future the annual and seasonal value of storage has potential to change more than in the past. As this occurs, the tradition for elevator rate structures of being low, stable, and unresponsive to cash market realities will become even more obsolete.

How did we get here?
One could ask why the above practices have been able to survive for so long? The easy answer might be the lack of marketplace discipline. But let’s dig a bit deeper.

It's important to recognize that a big share of the elevators across the Corn Belt area are owned and operated by cooperatives. In many of these cooperatives the decisions related to grain rate structures are being made by the wrong people. Sometime, probably 50 years ago, cooperatives started linking the “policy” to a discussion of storage and drying rates. And as any good co-op Board member knows, policy establishment is a role of the Board. At the same training session that the directors learned about policy responsibility, they should have also leaned the manager is responsible for the decisions that assure the cooperative is profitable. But still today, we see the majority of cooperatives clinging to the paradigm that the Board should make the grain service rate decisions.

Sometime, probably 50 years ago, cooperatives started linking the "policy" to a discussion of storage and drying rates. And as any good co-op Board member knows, policy establishment is a role of the Board. Step one in turning this situation around is dumping the word policy.

Am I placing all the blame for lack of market discipline at the feet of cooperative leaders? No, but I think that a starting place for getting value delivery and revenue generation in better balance at country elevators could well start with my friends, clients, and former peers who are the management leaders of cooperatives.

Step one in turning this situation around is dumping the word policy. Storage and drying rates are no more policy than are overnight basis levels or the pricing structure for grid soil samples. Establishing service rates is a management function.

Some boards justify their intrusion into rate establishment decisions based on this faulty reasoning: “If we allowed the manger to do it, they would be higher and our company would either be making too much money or be out of line with the competition and losing business.” I personally have much more confidence in cooperative managers than a director who would make such a statement. This badly flawed reasoning may even be the result of a board member having a poorly concealed conflict of interest.

Yes indeed, I believe that significant attention is needed within the country elevator industry to rethinking and restructuring the positioning and pricing of grain services. Capital needs are increasing. Balance sheets need more working capital. The need for strong earnings is evident.

Questions for leaders
Wise decisions are needed by professional business managers. Questions that need to be considered include:
1. How can grain elevators assure that rate decisions are being made by the same management professionals that are accountable for bottom line results?
2. Can country elevators continue to profitably provide the quality service that is in high demand by producers and price those services significantly under their market value?
3. Could grain bids be more competitive if services were carrying a rate more consistent with the value provided and if the merchandiser had greater control of grain fixed assets?
4. Should the elevator be subsidizing the producer who uses storage at harvest at the expense of those producers who opt to price and deliver at harvest?
5. How does an elevator create and reward customers for “loyalty” when rate structures are grossly under-valuing the services provided by the elevator to both the loyal and the transient customer?
6. Are some producers less effective grain marketing decision makers today because they have been insulated from the realities of the market by “confusing messages” delivered by elevator rate structures?
7. Must service rates be so rigidly structured and usually set for an entire crop year? Has the time arrived in this more volatile market and business environment for more flexible, creative, and market linked service rates?

To further discuss this leadership topic, please contact the author at (815) 743-3512 or via email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it


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