How Does High Grain Prices Affect “Elevator” Risks
Another slide that I found very interesting from the AG Symposium was the total estimated monies needed for grain purchase and hedging by commercials for corn, wheat and soybeans. The chart provided the actual amounts needed for the 2006-07 marketing year to the 2011-12 year and then provided an estimate of the worst case in 2016-17 based upon potential prices at that time.
For example, in the extreme price variability year of 2007-08, the amount of variability margin (basically the maximum margin versus harvested prices) was almost $30 billion with total amount needed of almost $62 billion. The variability margin the next year dropped to about $5 billion with a total needed of about $20 billion and in the 2009-10 marketing year, variability margin was actually slightly negative.
If prices continue high in the 2016-17 crop year (or any extreme year), the total amount needed may jump to well in excess of $80 billion and most of this may be actual cash needed by the elevators to handle hedging requirements.
We know how the 2007-08 year turned out for many elevators and we hope they are prepared for the extreme case in the future. This year may be one of them (although most likely not due to the variability margin being passed onto the crop insurance companies).
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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