Kub's Den

Farmers have had a hard time in 2019. From late, wet and sometimes outright-prevented planting in the spring, to the late, wet harvest and profit-eroding drying expenses this fall, their struggles have been well-covered. Approximately 9 million acres of corn is still needed to be harvested at the start of December, when winter storms barreled across the continent, burying crops in fields. And while we're saying a prayer for the resilience of the grain producers who are still struggling to get grain dried down and harvested out of those fields, perhaps we should also spare a thought for the grain-buying organizations that work with them. These are not all big, faceless corporations -- some are family-owned businesses and all have employees who count on a stable business to provide their paychecks.

Initially, we might think that local elevators across the Corn Belt are experiencing highly profitable opportunities right now -- buying harvested grain at steep discounts due to high moisture and low test weights, then planning to mix and blend those factors away to resell their entire inventory without such discounts. However, if an entire region is plagued by high moisture and low test-weight corn, then the local elevator may not have enough No. 1 or No. 2 corn in-house to blend away the discount factors. They may end up with an inventory that isn't able to be delivered according to the contracts they've made with buyers farther down the supply chain. A train-load of U.S. No. 2 yellow corn, for instance, must have a maximum of 15% moisture, a minimum test weight of 54 pounds per bushel, no more than 0.2% heat damaged kernels, no more than 5% damage overall, and no more than 3% broken corn and foreign material. Usually in the modern U.S. grain-handling industry, that's no problem. This year? A struggle for some.

Local elevators are usually also involved in retailing inputs to farmers. Propane demand has been, shall we say, "robust" this fall. One might think there's money being made in that market, but honestly, I haven't heard of any price gouging. It might be going on and I just haven't heard those reports, but for the most part, the farmers I've spoken to across the Corn Belt have been buying propane from their suppliers in the slow trickle available at relatively normal prices.

Meanwhile, there are myriad ways that grain elevators' and input retailers' profits have been threatened in 2019. I've made a short list, which I'm sure isn't exhaustive:

STORAGE RISKS: Any elevator that accepts wet grain from farmers and piles it outside risks future quality problems and discounts on that grain if it deteriorates in storage and can't later be blended off.

LIMITED BASIS TRADING OPPORTUNITIES: Basis trading margins are being squeezed from both sides in late 2019; basis levels are strong at the local elevator and weak at the export terminals. For example, a grain trading firm might typically buy "cheap" harvested corn at a local elevator in, say, Missouri at 30 cents under the nearby futures contract. The trader might store and transport that grain and eventually sell it for export in Louisiana in March at 55 cents over the nearby futures contract. In contrast, this year the opportunity is diminished. The grain trader is likely to be paying 15 cents under the March futures contract for the local corn and later may still only receive the 55-cent over-futures basis price at the Gulf (highly dependent on the trade war scenario). Obviously, changes in transportation costs, among other market changes, make it impossible to do an apples-to-apples comparison of generalized year-by-year basis trading opportunities. Nevertheless, the inability to buy "cheap" grain at harvest (in basis terms) is undoubtedly a stone around the neck of grain traders' profitability this year to match the cement boots they were already wearing since the trade war has limited export sales opportunities at the ports.

LOST FERTILIZER SALES: To the extent that farmers were unable to plant as many high-input corn acres this spring as they otherwise would have liked, it's likely that fertilizer sales were diminished last spring. And now, the extremely late harvest and wet or frozen ground conditions have prevented much fall fertilizer application.

LOST SEED SALES: There were unquestionably fewer soybean acres planted in 2019 than the industry originally planned to see. The seed that was returned or never purchased in the first place was a loss to retailers.

LOST PERSONNEL: In the regions where prevented planting and production losses are most severe, there are fewer bushels to handle, which not only means there will be less profit, but it also means there's just less to do. The manager of a co-op in northwestern Ohio told me earlier this fall that agricultural businesses in that area were cutting staff numbers by as much as 15%, and of course there's risk that once good employees have been lost and moved on to other opportunities, it will be challenging to re-staff once things get back to "normal."

Fortunately, most grain trading companies are diversified. Some large cooperatives now derive significant portions of their income from processing activities and the energy sector. In their Annual Report released in September, CHS Inc., for instance, detailed "generally decreased margins and decreased or flat volumes across most of our ag segment during fiscal 2019," offset by increases in certain agronomy products and by significant increases in the cooperative's energy segment. But this is a worrying time for companies whose primary focus is agricultural commodity trading. Louis Dreyfus Company, in a staff memo last week reported by Reuters, announced cost cuts amid dwindling profits: their net income from continuing operations in the first half of 2019 was down almost 20% compared to same six-month period from 2018. Meanwhile, share prices for Archer-Daniels Midland are down 7.7% from year-ago levels, and share prices for Bunge have dropped 9.6%.

Most agricultural company reports these days seem to include the same predictable platitudes about conditions likely improving sometime in 2020. Much of that optimism seems to be dependent on a shift in the ongoing trade war conditions, so take it for what that's worth. But I think we can all agree that a return to "normal" (normal weather, normal planting, normal trade) would be helpful not only for grain farmers, but also for the thousands of businesses that depend on high volumes of grain and inputs to pass through their hands.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.comor on Twitter @elainekub.

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