Grain Elevator Outlook: Accelerated Merchandising Margins Today, Potential Volatility Tomorrow

Key Points

• An explosive rally in grain prices – driven by a smaller-than-expected U.S. harvest, strong China export demand, dryness concerns due to La Niña, and resulting tight corn and soybean stocks – dramatically changed the complexion of the 2020-21 grain marketing season.
• The resulting effect was grain cooperatives accelerated merchandising as farmers rushed to sell and lock in gains. In doing so, elevators were able to capture strong margins on old crop, as well as on new crop which they bought and resold into a rising market.
• This activity has required elevators to increase borrowings under existing credit lines and/or to obtain large increases to their seasonal borrowing programs. CoBank has actively supported customers’ funding needs, specifically the cash flow timing mismatch between current cash outflows (for grain purchases) and delayed capital inflows (payables from processors and exporters).
• Having already accelerated merchandising, elevator activities will be limited over the next three months until the market has greater visibility as to U.S. planting intentions for 2021-22 as well as the size and quality of the crops from the ABUR (Argentina, Brazil, Ukraine and Russia) growing regions.
• Given the continued inversion in futures prices, we see volatility ahead that could limit opportunities for elevators to buy basis cheap and capture carry, at least during the near-term. However, grain cooperatives that also have farm supply divisions should benefit from a strong fall application season and what we believe will be an acceleration of farmer prepayments of spring crop inputs prior to year-end.

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