This year’s difficult harvest means you have a lot of decisions to make. Should you harvest tough or damp grain? If you do, should you dry it or sell it at a discount?
This year, some grain companies are offering premiums to producers bringing in dried grain, so that they can blend it with all the tough grain they anticipate will be harvested.
If you know your per-bushel costs to handle and dry grain, do the math to determine if you should bother drying your grain further to get the premium some grain companies are paying.
Remember to calculate shrinkage loss into this equation. You lose bushels with every point of moisture that you dry out of your grain. The premium they’re offering better be enough to cover your drying cost and your shrinkage loss or it is not worth spending your time or money doing it.
Profit from spreads
In years like this where weather severely impacts quality, grade spreads, moisture discounts and protein discounts typically widen out.
For example, let’s look at the market for CWRS. Different grain companies use a different grade as the base grade for the daily price quotes they send out to customers. Some use No. 1, 13.5 per cent protein. Others use No. 1, 12 per cent; some use No. 2, 13 per cent.
If you had pre-contracted some of your wheat before harvest and sold it as a No. 1, 13.5 per cent and then you harvested a lower grade or protein, the grain company would apply discounts as determined on the day of delivery, paying you for the grade you delivered. Pre-pricing doesn’t lock in your grade discounts should you run into a harvest quality situation.
In a normal year where 70 per cent or more of the wheat harvested grades in the top two grades, you won’t see much fluctuation in grade spreads. Or, spreads may narrow a bit as grain companies compete to buy grain to blend and sell.
In a year like this where maybe 50 per cent or less of the wheat harvested is going to grade in the top two grades, grain companies widen out grade and protein spreads so they can blend various grades and proteins to meet demand. Grade spreads may widen out many times during and after harvest, as grain companies try to figure out how best to profit from this year’s supply.
Try to protect yourself from the possibility that spreads will continue to widen out before you deliver your grain. One way to mitigate this risk is to contract your wheat at a lower grade and protein level than you expect to harvest. For example, instead of contracting a No. 1, 13.5 per cent protein, consider contracting a No. 2, 12.5 per cent protein.
If you are pre-pricing wheat before harvest, grade spreads and protein spreads are going to be at lower, more traditional levels as the industry will be anticipating a normal harvest. Generally, if there are weather problems at harvest but you can deliver a higher grade than you contracted, you could see your premiums for better grades and proteins increasing. If you deliver a lower quality than you contracted, you may be subject to wider grade discounts. But remember, those discounts would apply from a No. 2, 12.5 per cent, instead of from the higher grade you would have usually contracted. This should reduce the overall discount coming off your cheque.
You could apply this same strategy to moisture when contracting. You could pre-contract your wheat as a tough No. 2, 12.5 per cent and negotiate terms, such as that the “tough” discount will only apply on grain that is 15.5 to 18 per cent moisture. This way you have locked in the discount if your grain should end up tough, and also negotiated some extra leeway, allowing you to deliver wheat with up to 15.4 per cent moisture as dry without any discount, or up to 18 per cent moisture with a discount for tough instead of damp. This may allow you to start harvesting earlier and gain extra bushels from the additional moisture in the grain. This is money in your pocket.