April into early May was a challenging time for some elevators. As prices continued to climb—corn prices shot $1 higher in just two weeks—some elevators were left with a different scenario: margin calls.
The margin calls weren’t just in the thousands. According to some marketing analysts, there were elevators looking at margin calls in the millions, with some banks even contemplating not extending lines of credit. At the same time, CME raised the margin requirements at least six times in the past six weeks, which meant even more capital was required. And the money to pay for those margin calls was something CME requires daily.
Since the market has backed off a bit, the situation is improving, with elevators restoring some of that money lost. But if another sharp rally should come, and with expanded limits in place, there are elevators that could be faced with a similar dilemma: how to pay for the steep margin calls.
In a business where elevators focus on flat-price, not futures, Chip Nellinger of Blue Reef Agri-Marketing says grain buyers have been in a similar situation before.
“Looking back to 2012, we were allegedly within a day or two of having some major ‘ABC grain companies’ having to go to some alternative financing,” he says. “I don’t think we’re quite to that level. But if it gets to that, and an elevator says, ‘Hey, I’m done margining this thing,’ what that means is they’re owned inventory is going to hit the market. They’re going to sell their own inventory and get out of their hedge. It’s going to put grain on the market, and that could cap us a little bit.”
Nellinger says if elevators would liquidate some of the owned inventory, it could also impact the market spreads, but the cost to forward sell that is a concern for Bob Utterback of Utterback Marketing.
“The cost for elevator, they’ll try to pass that to the producers, and they’ll start charging you more to forward sell,” says Utterback. “Right now, it’s 10 cents to forward sell. So I can see it going to 25 to 30 cents to forward sell. The cost to sell on a cash versus the board could be significant.”
Utterback says the other trap could lie in what’s called a turbo contract.
“If you have one of these turbo contracts that are popping around, you sell the corn and you get a premium price—but if the market goes up, it doubles up. This is not the year to be doing that as a farmer merchandiser, because you could get yourself really trapped.”
He says the other possible roadblock would come in the form of basis; an element that could impact farmers come fall.
“They’re going to have to do something to recover,” says Utterback. “But it could be a real interesting fall time period. As a farmer, I would position myself not looking for carry to come back in the ’21 crop. And I’d be thinking right now I’m going to sell off the combine and not store unless the market is paying me to store. So that would be the marketing plan you should be put in place. And I know a lot of farmers don’t like that because it hampers their harvesting procedure. But if you’re paying the market to store and the front-end December is premium for the March and March is premiums to the May, you’re paying for the right to be long, you should get rid of it.”
