05 Apr Career Spotlight: Grain Merchandiser
A Grain Merchandiser is someone who is responsible for buying and selling grain. Typically a Grain Merchandiser is purchasing physical bushels of grain from a farmer or country elevator (meaning a grain elevator that collects farmer grain during harvest) and sells grain to exporters, processors, end users, or other Grain Merchandisers. The merchant is also often responsible for arranging and paying for the shipment logistics which may include truck, rail, barge, or vessel transportation. With nearly 20 billion bushels of grain grown in the United States per year, this is a very important job at the intersection of farming, agribusiness, finance, and marketing. Grain Merchandisers might work simply as third party middle men looking for opportunities to make money in the markets (also referred to as “Grain Traders”), or they could work for ethanol plants or grain elevators just buying grain from farmers (called “originating”). They could also work for large livestock or poultry feeders, millers and processors, or exporters involved in the buying and selling of grain. A Grain Merchandiser is NOT a Broker. In the grain and feed business, the job title of “Broker” refers only to those who bring buyers and sellers together and make money from the transaction (brokerage fee). Instead a Grain Merchandiser actually assumes ownership of the grain and either stores those bushels or sells them on down the supply chain. Because grain merchandising is more or less serving as a “middle man”, when trying to explain the function of the career field I often feel like this scene from the movie Officespace (forgive the sound quality and language):
All joking aside, however, a Grain Merchandiser serves a very important and complex function. The grain markets are traded based off of grain futures contracts, which like the stock market, fluctuate in price most ever day. Because of the unpredictability in these prices, farmers and other sellers want to sell their crop when they deem the market to be high and buyers want to buy the grain when they deem the market to be low. These creates a disconnect between buyers and sellers and would make it very difficult to get any business done without merchandisers to serve as “middle men” or “market makers”. But how do Grain Merchandisers buy from farmers when the market is high and sell to end users when the market is low? Wouldn’t that mean they would lose money? The answer to this lies in two very important terms to know when learning grain merchandising: basis and hedging. Basis is a term that means the amount of money above or below the current futures price that it will take to buy or sell actual bushels of physical grain (the market for physical bushels of grain is called the “Cash” market). As an example, if a farmer is willing to sell 5,000 bushels (bushel = approx 56 pounds of corn) at a price of $4.00 and the current price of corn futures on the Chicago Mercantile Exchange is $4,10, then the farmer is willing to sell a basis of -$0.10 (a merchandiser would read this as “ten under”), and the “cash price” for that bushel of corn is the $4.00 that the farmer is wiling to sell. FUTURES ($4.10) + BASIS (-$0.10) = CASH PRICE ($4.00) At the same time, if the Grain Merchandiser knows of a nearby cattle feeder that is willing to pay $4.25 cash price for 5,000 bushels of corn, what would the basis be on that? If you said +$0.15 you are correct ($4.10 futures + $0.15 basis = $4.25 cash), which a Grain Merchandiser would call “15 over”, meaning 15 cents above corn futures. So if our proficient Grain Merchandiser buys from the farmer at -$0.10 ($4.00) and sells to the cattle feeder at +$0.15 ($4.25), he makes a profit of $0.25/bushel, right?…..Almost. It is still up to the merchandiser to transport that grain from the farmer or elevator where it is stored to the cattle feeder. Let’s say this cost is $0.15/bushel so in this case the Grain Merchandiser makes their company $0.10/bushel. The example above works great IF the farmer wants to sell at the same time the cattle feeder wants to buy. But in reality this is rarely the case. This is why hedging is a very important part of a Grain Merchandiser’s job. Hedging, in this sense, refers to eliminating the futures from the equation. When he buys the corn from the farmer at $4.00 he buys 5,000 bushels of actual grain and at the same time sells the same amount of bushels in the futures market at $4.10. At that point the Grain Merchandiser is LONG 5,000 bushels of corn at -$0.10 wherever the futures go from that point forward. The term LONG means the merchandiser has bushels bought buy not sold. The opposite of this SHORT which means the merchandiser has bushels sold but not yet bought. So if the futures drop to $3.50/bushel a month after buying the farmer bushels at $4.00 and the cattle feeder decide that they now want to buy those 5,00 bushels at $3.75/bushel the Grain Merchandiser actually makes even more than before. In fact, their margin improves from $0.10/bushel to $0.20/bushel because they bought -$0.10, paid $0.15/bushel in freight and sold the grain for +$0.25 ($3.75 cash – $3.50 futures = +$0.25). Don’t believe me? Here’s the math:
- Purchased grain at $4.00 and sold futures at $4.10, leaving the merchandiser “short” futures at $4.10 and “long” cash grain at -$0.10
- Futures dropped from $4.10 to $3.50. Since the Merchandiser was short and the market dropped, they made $.60/bushel
- The cash price was bought at $4.00, paid $0.15 in freight and sold at $3.75, so in this transaction the Merchandiser lost $0.40/bushel
- The end result is making $0.60/bushel in the futures market and losing $0.40/bushel in the cash market, resulting in a $0.20/bushel net profit
This is how Grain Merchandisers use basis and hedging to buy when when there are motivated sellers and sell when there are motivated buyers. You may notice that the cattle feeder paid a higher basis when the futures were at $3.50 than he would have when futures were at $4.10. That’s because basis fluctuates based on supply and demand. When there is more demand for the product for whatever reason (in this case because the cash prices were lower) basis will go up. Where there is less demand basis will go down. This is how a Grain Merchandiser makes his/her money by buying and selling good basis levels and utilizing hedging to eliminate the risk of the futures price moving against them. This is also just scratching the surface. A much more in depth tutorial on Grain Merchandising would include more complicated topics such as arbitrage (buying grain in one area while selling it in another to take advantage of price discrepancies), or futures delivery house economics. These more complicated topics and the fact that the markets are always changing make the position of Grain Merchandiser a challenging and rewarding profession. In order to enjoy life and thrive as a Grain Merchandiser, it helps to be competitive by nature, enjoy business, willing to talk on the phone most of the day, have a knack for relationship building, and have a certain degree of natural hustle. If this sounds like you, please join our mailing list or follow us on Twitter @AgGradJobs. Or feel free to leave a comment below and we will be happy to respond. This article was written by Tim Hammerich, an AgGrad Consultant who has spent eight years in the grain and feed industry.