WEEKLY FARM: High Prices, Risky Contracts Pinch Elevators, Farmers
Dec. 16, 1995
WASHINGTON (AP) _ Soaring crop prices and high-risk contracts have put many grain elevators and their farmer-customers in a financial squeeze.
Elevators say they've been forced to tie up large sums of money on contracts without having corn and soybeans to sell. Lured by even higher grain prices in the future, farmers are walking away from contracts. And farmers aren't always getting as much as they expect in the complex transactions.
The losses hurt small communities where the elevator can be more important economically than the bank. The problems also show up at a time when farm program changes will force private markets to take over more of the government's job as protector of farm income.
The past decade has already been hard on the elevator business. Mergers have pitted smaller elevators against larger ones. The government stores less grain, taking away a big chunk of business. Farms, too, have become larger, and their operators more sophisticated and demanding.
To snag more business, elevators have had to offer new features in their contracts with farmers.
``When somebody is looking for a leg up on their competitor, oftentimes they'll put a different spin on a contract,'' said Joseph Dial, a commissioner of the Commodity Futures Trading Commission, which regulates grain markets but not the elevator contracts. ``I think perhaps some of these spins may spin them into orbit.''
Farmers typically have sold grain by cash contract, agreeing to deliver grain to the elevator at an agreed-upon price in the future. The elevators then used transactions on the regulated commodities market to secure the price.
To use the market, elevators have to put up some money as a guarantee.
Over the past three or four years, elevators have been offering more elaborate deals that offer farmers a chance to get better prices and the elevators a chance to move more grain.
But 1995 has been an unusual year. Corn prices, after having fallen below $2 a bushel last year, hit $2.50, $2.60 and even $2.70 in the summer. Many farmers thought that was a good price and signed up to sell grain to their elevators.
But prices kept going higher and higher as the weather-doomed corn crop got smaller and export demand rose. With prices pushing above $3, the summer highs looked less attractive.
Some contracts let farmers put off the agreed-upon delivery. Farmers did that, hoping to deliver after prices fall nearer to the contract amount. In the meantime, they made short-term money by selling grain at a higher cash price.
Farmers also pushed for contracts to sell several years' worth of crops in advance.
Several things happened to farmers. The high prices weren't so high when charges for storage and transportation were considered. And some farmers agreed to sell more crop than they could harvest.
``What they thought was 80 percent of the crop, which was not terribly aggressive, turned out to be 110 percent of the crop,'' said Ted M. Abele, a Kansas City, Mo.-based consultant to farmers and grain elevators.
Elevators feel the pinch because they're being forced to tie up more and more collateral, known as margin, and pay more interest on that money as outstanding sales pile up and the futures market rises.
``All of a sudden you're financing a huge margin on this stuff and you don't have any hope of recovering any of that for a year or two years or three years,'' said John Fletcher, vice president of Fletcher Grain Co., Inc., in Marshall, Mo., and chairman of the country elevator committee of the National Grain and Feed Association.
Gary Maxwell, interim manager of the Great Plains Cooperative Elevator in Benedict, Neb., said the elevator has $4 million tied up in margin money, complicating the sale of the elevator to a neighboring co-op.
``Farmers this year have a tendency when grain goes up a buck not to deliver their contracts,'' he said.
One elevator, Tri-Line Farmers Cooperative in Clarkfield, Minn., fired its manager last month, then sued a group of farmers, alleging the farmers used the contracts for speculation and had no intention of delivering their corn and soybeans. The elevator said the contracts will cost it $1.5 million.