ASK YOUR DAUGHTER IF YOU SHOULD REALLY BE GIVING GRAIN AWAY OFF OF THE COMBINE

This is Jeremey Frost with some not so fearless grain market comments for www.Barchart.com

Here is a conversation I was having with my daughter the great Dan Dan Frost (I don't know if she is going to care for me using her nickname.)  As we drive by a soybean pile, she starts off asking me a question about why farmers are selling grain now.  

Question?: “When is supply for grains at the highest level of the year?"

Answer: "I think you already know the answer little girl from looking at the ground pile, but it is sometime in the next 30-45 days." 

Question?: “Why would one sell grain when the supplies are the highest?”

Answer: “Dani every operation is different, but generically speaking suppliers (farmers in this case) shouldn't sell cash grain when the supplies are the highest.  Isn't that what you learned in ECON 101?”

Question?: "They why are farmers selling so much grain that they have to pile it on the ground?  Are farmers just not the smart?  I don't understand why a farmer would sell when the supply is the highest?"

I went on to explain that every operation is different and not everyone has grain bins like we do in Sully County.  I mentioned a couple different local operations and how it made sense for one to be supplying the market a little bit, while it did not make sense for the other operation to be selling any grain at this time.  All the while trying to add the mystery of cash price, basis, and futures price without confusing my little princess.   I mentioned how some of the grain was probably sold when prices were higher.

But my little girl is stubborn, and she just refused to understand why a farmer would supply grain at its highest supply point.  

The reality was my daughter was completely right and anyone that ever went to high school or understood much about supply and demand would agree that one doesn't supply product when the market has the most product available.  But with all the factors that go into a profitable grain marketing plan it is understandable how and why farmers supply grain at harvest.  After all bigger supply (i.e., wider basis) creates demand so we need to supply some when the buyers want it, or we run the risk of them finding replacement supplies and potentially even different product substitutions.  

If you are do more than your fair share of supplying to the elevator off of the combine.  Please stop and build some bins if you need to.

If you are someone that doesn't use Hedge To Arrive contracts, Futures Fixed contracts or futures and options, consider asking someone close to you if they think it makes sense to be suppling your product when the supply is at its highest.  

If you utilize HTA contracts or FF contracts, or futures and options.  That likely means you have already broken apart the components that arrive at the net price of grain one receives.  The biggest two being Futures price and basis.

It goes without saying that basis should be its weakest when supply is its highest.  

Thanks,

Jeremey Frost

605-295-3100

Read the article on Barchart here

On the date of publication, Jeremey Frostdid not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.