Not knowing the lingo can keep a producer from discovering new ways to market grain. I thought I’d take some time to review some of the lingo one can come across in the grain-marketing world. These are basic explanations. Each area can be expanded into much more detail than described here.
Trading months and symbols
Canadian canola and feed barley futures are traded on the Intercontinental Exchange (ICE). The exchange operates three futures exchanges, among other endeavours.
You might hear a producer say, “I locked-in 200 tonnes of canola at 10 under JAN for NOV-DEC then went long the futures.”
The translation is, “I booked 200 tonnes of canola, basis only, at $10 under January futures for November through December delivery. I have until the end of December to fix the futures prices. Next, I bought 200
tonnes of January canola futures through ICE in the hopes the futures will go up. When they do (I pray), then I’ll sell back the futures to the exchange and add the profit to my cash (physical) canola.”
If it sounds confusing when someone talks about the futures market and what their plans are for trading, here’s a tip to remember the terms:
“Long the futures” equals “buy” a contract.
“Short the futures” equals “sell” a contract.
When checking canola and basis contracts available, remember some companies use different futures months to trade a particular delivery period. For example, if you wanted to haul canola in November 2009, one company may quote you a price based off NOV futures while another may use JAN futures. The difference could be significant.
If someone talks about options, the option is either a “call” option or a “put” option. An option on a futures contract gives you the right, but not the obligation, to a long or short futures position. My way to remember, which option is which, is:
“Call me up” You buy a call because you think the market is going up (positive.)
“Put me down” You buy a put because you think the market is going down (negative.)
Another area to ensure clarity is when discussing freight terms. What exactly does “FOB farm” mean? FOB is short for “freight on board.” So, FOB farm means the quoted price is what the producer takes to the bank. Freight is accounted for.
The buyer either pays the freight himself and sends just the grain cheque to the producer OR the buyer sends the grain cheque AND the freight cheque to the producer (the freight company then sends his invoice to the producer). The bottom line is the net grain price is “at the bin” or the actual dollars the producers takes to the bank.
If the price quoted is FOB the buyer, it means the producer incurs freight costs himself -either he hauls it or hires someone to haul the grain to the destination. This is also referred to as “delivered” to a particular location.
Here are a few scenarios that reflect the farmer receiving the same price “at the bin”:
A producer in Hanna, Alta., wants to sell barley for $156 FOB farm. Offer is $175 per tonne delivered Lethbridge. See Table 2 for the possible freight cost scenarios.
(see table 1)
As an aside, Super Bs used to typically carry a minimum of 40 to 42 tonnes of grain. Today, 44 tonnes or better is not unusual. Remember, when loading grain, you can expect extra charges if it takes longer than one and a half hours to load the trailers.
GPOs (Grain purchase orders)
This is a marketing tool where the farmer sets a firm target price for his grain. It details the quality of grain, the tonnage, the time-frame, freight costs, and an expiry date. If the price is hit within the parameters given, the grain is sold without any further permission from the producer. The GPO can be used for grain already in the bin, for grain that will be in the bin in the future, or even to attain basis contracts. It’s a fantastic tool during busy times for the producer or during market volatility.
Basis is the difference between the futures price and the cash price. It can be described as either wide or narrow. Basis is an indicator of supply and demand. Here are three canola examples: (See table 2)
Consider locking-in a narrow basis in a basis contract as part of a grain marketing strategy. Narrow basis contracts can be offered for future delivery. The buyer benefits by guaranteeing a certain amount of delivery and the producer benefits by guaranteeing himself a narrow basis. In rising markets or heavy delivery periods (many bills need to be paid in October), basis will typically widen out, thus reducing the net price for the producer:
(See table 3)
When selling wheat, rye or triticale, a buyer may ask the typical questions about the grain’s specifications, then also question, “What’s the falling number?” This stumps many grain producers. A falling number is an internationally standardized method for sprout damage detection. The test measures the alpha-amylase enzyme activity in grain to detect sprout damage and optimise flour enzyme activity.
Each buyer may have his own requirement for a falling number value. With wheat, for example, a falling number value of 350 seconds or longer indicates low enzyme activity and sound wheat. Values below 200 seconds indicate high levels of enzyme activity, indicating lower quality. With rye, some buyers indicate a falling number requirement of 180 for particular uses. Falling number tests and results can be obtained from seed testing laboratories.
These are but a sample of the many terms and concepts in the grain marketing industry. If someone uses an unfamiliar term or concept, ask the question, “What does that mean?” A quick answer could open your eyes to new pricing opportunities.
Shelley Wetmore is owner of Market Master, a feedgrain brokerage and consulting service based in Edmonton. You can reach her toll free at 1-800-440-8390 or visit www.grain-watchdog.com