Pursuing the Perfect Price . . .or a Producer Pricing Portfolio?

By Diane Klemme, Vice President, Grain Service Corp in Atlanta, GA

Most of us concede we're not great at managing a stock portfolio; many people select mutual funds for that. Some investors like to check a fund's value or performance daily, while others barely check their quarterly statements. And we generally accept that no single fund will be the top performer every quarter or every year. Many producers, on the other hand, pursue "the perfect price" for their crops, often passing up what later turns out to have been excellent opportunities, striving for just a few more cents . . . or lament selling "too soon."

Internet grain pricing
Producers now have a way to price their grain that resembles the mutual fund approach: E-Markets' Decision Rules for Contracts^SM pricing tool (DRC^SM pricing tool). An Internet-based grain pricing system, this product acts like a computerized professional marketing manager--for each individual's grain. The system offers the neutrality, convenience and performance-accountability of mutual funds. The DRC pricing tool differs from a mutual fund in that the producer doesn't buy shares at a value, nor does the producer have to commit bushels to a "one size fits all" cash grain pool. The producer commits with an elevator to deliver grain; the DRC pricing tool handles pricing that grain.

The DRC pricing tool triggers objective pricing decisions using one of five unique pricing models the producer selects (refer to table 1). Two models trigger pricings based on market action.

Because the DRC pricing tool is automated, it eliminates pricing indecision, one of the biggest obstacles to successful marketing. After the producer decides how many bushels to market and selects a pricing model and timeframe, E-Markets' tool determines exactly when to price. The producer no longer has to ask each day: "Should I sell today?" The producer is still involved, but less directly.

Producers can only use the DRC pricing tool through a participating grain buyer. E-Markets works with the elevator instead of as a competitor. The producer commits grain to the buyer through a firm-offer or a cash contract. E-Markets does not buy the grain, nor does it determine or influence the contract between the elevator and the farmer. The process works as follows:

• An elevator or terminal signs on with E-Markets and is trained how to use the system, and how the models work.
• A producer offers or sells grain to the buyer--unpriced--and selects a model. The elevator writes a purchase (or offer) contract with agreed-upon delivery time/terms.
• The elevator goes to the E-Markets website, into the secured DRC module, and enters the appropriate information: bushels to price, which DRC pricing model to use and the pricing time frame.

  This creates a pricing agreement with a unique identification number. This DRC agreement isn't a purchase contract; it's a summary of the criteria that E-Markets is to follow.

• The E-Markets mechanism takes over, monitors the calendar or the futures market and notifies the elevator when and at what futures value bushels are to be priced under the DRC agreement.

  Incremental pricings might occur daily in some models, only under specific circumstances in other pricing models.

• The buyer then hedges the price risk, sells cash grain or stays long. E-Markets does not tell the elevator/buyer how to manage the price risk, just when the risk arises.
• The producer's cash contract price is fixed: DRC value + basis.
• Producers can modify the pricing agreement on any remaining unpriced bushels--to select a different pricing model, or even withdraw from the DRC pricing tool and price the contracted bushels directly.
• Marketing advisers can also use the DRC pricing tool by working with an eligible elevator and a producer.

Constant access

E-Markets provides constant Internet access over a secured server. The only parties who can review a DRC agreement's pricing record online are the buyer or the producer. They must have the correct ID and code number to review specific data, just as you need a password or ID to access a bank account online.

E-Markets also offers 30 years of historical futures price data online, allowing anyone to "test-run" the DRC strategies to evaluate performance. That can be an eye-opener!

Some elevators worry about having many small pricings to document on their position report each day (e.g., a farmer with 10,000 bushels in a six-month Market Index Forward DRC agreement will be pricing about 79 to 80 bushels/day). One solution is to create two categories: unpriced bushels and priced bushels. Put 100% of the unpriced bushels in "unpriced," and make just two entries on any day bushels are priced, no matter how many farmers or how many bushels you have in the DRC pricing tool. First, decrease "unpriced bushels" by whatever E-Markets tells you to price and secondly, increase "priced bushels" by the same amount in one entry.

The E-Markets website tracks all pricing data on each individual agreement, when one farmer's contract is 100% priced you move it from "priced bushels" to "priced open purchases" (if it's not delivered yet). Accounting firms also indicate keeping DRC pricing records on E-Markets' server is adequate documentation for an elevator's book for month-end purposes.