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Adjusting to Altitude
by Sherry Lorton

Elevators have come to count on the margins from merchandising long-the-basis positions, but significantly higher commodity prices have affected the amount of bushels they can carry. An elevator with the working capital to own 500,000 bushels of $2 corn can afford to carry less than half this amount at today’s prices.

The dilemma facing grain businesses is how to maintain margins while keeping the size of positions within their balance sheet. As we move forward, it will take more money to effectively operate a successful grain business. To meet these growing financial demands, every business needs long-term plan to increase working capital.

For the short-term, maintaining income comes down to being an astute basis trader. If you cannot carry the size of position you are used to, then find a way to turn your position more frequently and squeeze bigger margins from more bushels. Some of the best basis traders I know started with limited financing. They had to be savvy traders because carrying a huge long-the-basis position was not an option.

Getting More From the Basis
Every change in basis (even small ones) is money (margin) to be captured. Herein is the key to generating margins without using a lot of money.

The basis chart here illustrates corn basis for a typical marketing season. One approach is to fill up at harvest with corn at -20 DEC and hold it for a sale in June at -10 JUL. This enables you to maximize your margins from the basis and the spreads, but it ties up lots of money for a lot of time.

Instead, capture more of the short-term changes in the basis throughout the season by trading the upward and downward moves. For example, whenever you have the opportunity to lock in a good sell basis, sell not only what you own but what you anticipate buying in the months to come. As the basis weakens, fill in the short-the-basis position and then re-accumulate additional long-the-basis bushels. It is a continuous cycle to buy low basis, oversell high basis and buy-in low basis. This keeps the size of your basis position to a manageable level, generates good margins from both sides of the basis and doesn't tie up a lot of money for long periods.

The Skill of Using Less Money
There are four skills necessary to trading basis effectively in this manner:

Be aware! You can’t check the basis once a week and expect to find good opportunities waiting for you. It’s something you have to spend the time on every day: researching basis, talking with buyers, turning over every rock.

Have intimate knowledge of local market basis. What is grain worth? What’s a good sell basis? When can you expect basis improvement and when can you expect basis declines?

Develop markets you can structure forward sales to. Don't limit yourself to trading in the nearby. Constantly look ahead and strive to put together forward sales at good basis when you can. Sometimes, you must show the user how buying ahead will benefit their operation.

Don't limit your merchandising to just those bushels that come across your scales. Explore opportunities to buy grain from non-traditional sources, such as grain delivered direct off-the-farm to another buyer, grain purchased from another elevator or grain from outside the area you buy through a cash broker. The key to expanding margins, without holding more bushels, is to get involved in merchandising more bushels. You need not handle the grain to profit from merchandising it.

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