Are Grain Elevators Benefiting from Tariff Aid Payments?

John Phipps tackles the topic of wide basis and more in Custom Support this week. ( MGN )

The following is John Phipps' Customer Support segment that aired November 10, 2018 on U.S. Farm Report. Each week, John answers a viewer's question on the show. 

Guy Mills, Jr has a beef about the tariff payment.

“Please follow the $1.65 payment to farmers. What is happening today is a widening of the basis and a demand farmers sell beans rather than store. Elevators will end up with most of this payment not the farmer.”

There are several issues with your statement so I will try to unpack it piece by piece.

First, the basis problem. For those unfamiliar, basis is the difference between the underlying futures price at the CME and the local price at the elevator. It is usually a negative number, and depends largely on location and supply and demand for the commodity. This year our basis was historically wide or very negative. It still is. If you watch our roundtables each week, this issue is almost always debated, and I defer to our experts.

But it seems safe to say, elevators were simply not anxious to buy because they had plenty of beans already, knew there were lots more coming, and didn’t want to get stuck holding them if the tariff war continued to reduce exports. Did the announcement of the MFP payment add to this reluctance to buy? Undoubtedly. I would have dropped my bid too if I were an elevator, or I might end up with beans I couldn’t sell profitably. This is simply good business and a lesson in how inefficient such subsidies are.

Will the elevator end up with the bulk of the payment? Not always. Many producers had forward sold or hedged their crop, as almost every analyst had been advising for months. So some producers will keep virtually all of it. Besides it takes some fairly high-powered math to sort out supply and demand effects from payment effects on farm price.

I know this will be irritating but the idea grain dealers demand farmers sell made me laugh out loud. While they can set the price for their storage and basis, they can’t coerce anybody into doing anything. Marketing plans that don’t include recognition for value of storage facilities, or the possibility of big crops leave much at risk. Even the tariffs were fairly predictable when the president appointed a staunch China opponent as top trade official.

Finally, I have learned one rule the hard way over my career: don’t go to war with your customer. My grain checks from Cargill never bounce, and they busted their butts to stay open this fall. I’ll let them run their side of our transactions, and I’ll take responsibility for mine.